How to estimate valuation for early-stage startups
This is a question I get a lot, so I wanted to share a response that I recently shared with someone as a way to potentially help others.
The question is:
What resources are there for valuing early-stage startups? How do you estimate the valuation of a startup?
I’ll be honest – valuation is probably one of (if not THE) trickiest parts of startup investing.
I think the #1 way to get better at valuation is simply to start looking at deals on Reg CF platforms like Wefunder, StartEngine, Republic, etc. The more you see, the more patterns you’ll be able to recognize, and thus the better you’ll get at recognizing whether a deal is a good value or not.
There are so many variables that it really is nearly impossible to come up with a formula. For example – two businesses could be absolutely identical, except that one founder is new and one has had successful past exits – and thus the latter may actually be 2-3X (or more!) in valuation.
Jason Calcanis has a valuation vs. traction matrix that – while somewhat subjective – can be a good starting point for visualizing valuation:
The biggest things I tend to look at are revenue, revenue growth, profitability, potential future market, and the founders. But of course there are so many other aspects to a startup’s business.
Crowdwise Academy also has two great advanced lessons on valuation (Startup Valuation Part 1 and Part 2). These are a good start, but as I mentioned there, valuation is something that could literally fill volumes of a study course. Here are two blog posts that re-hash some of the same content in the courses:
This is another reason I try to focus on pre-seed and seed stage deals, typically under $20M valuation. That way, I start to get very familiar with what a $5M vs. $10M vs. $20M company looks like. Above that, it depends so much on who else has invested, etc., that I really try to narrow my focus.
What other resources do people use when valuing startups?