Early last week I was talking to an entrepreneur about startup valuations and how for the Series A round it really depends on the amount being raised. The idea is that VCs want to own roughly 1/3 of the business, so if you raise $3 million, your pre-money valuation will be $6 million. If you raise $4 million, your pre-money valuation will be $8 million. Some VCs want 40% of the equity so the pre-money valuation, assuming the same amount raised, will be slightly lower. The valuation is based on the amount being invested and the desired amount of ownership by the investor.
Now, once the startup starts generating revenues the valuation dynamic changes to more traditional metrics. Here are four quick factors in startup valuations:
- Profits/earnings – the amount of money the startup makes, typically before factors like taxes, interest, depreciation, and ammortization
- Growth rate – the faster revenues and profits are growing, the more valuable
- Recurring revenue – the greater the percentage of revenue that’s recurring, the more valuable
- Gross margins – the greater the gross margins, the more valuable
So, a company that is extremely profitable, growing fast, 100% recurring revenue, and high gross margins will be the most valuable, everything else being equal.
What else? What are some other factors in startup valuations?