Every week, I receive a bunch of pitch decks from startups around the world asking for advice. They are all eager to raise pre-seed, seed, or their first A round. As you know, these decks usually include a “Funding” page. Here, you’ll find the first of two clues to the question “How much is my startup worth?”. The first clue is – the founder’s valuation of their own company. A bit of simple deductive math will reveal this figure swiftly. As an investor, mentor, or simply a curious reader, you’ll likely have one of three reactions.
Reaction 1: A Massive Heart Attack from Laughter
Take a fintech company, for example. Buckle up for this one. They’re raising $5,000,000 for 5%—pre-revenue, pre-launch, pre-everything. Such decks speak volumes about the founders’ experience with valuations (or lack thereof) and their need for mentorship. Essentially, they’re valuing their non-existent company at $100 million. While the idea might be brilliant and the industry booming, the valuation raises a critical question: Do we have a confident CEO shooting for the stars, or one who lacks the experience and understanding to develop value and, potentially, a business? Yes, I know there are many other questions you can ask or deductions you can come up with about the founder … I totally get it and agree but let’s keep that as a secret between you and I.
Reaction 2: A Satisfied Smile
Here, you receive a pitch deck that feels just right. The founder has clearly considered the TAM, SAM, SOM, market variables, comparables, and conducted thorough due diligence, arriving at a reasonable valuation. For instance I got this one a few months ago, a fintech AI-driven company raising $250,000 at a $5,400,000 valuation with a solid track record. You can hop on this train with confidence. There’s market traction, a sensible valuation, and a clear methodology behind it. This indicates the founder is either experienced or has stellar mentors and advisors guiding them. Allowing them to understand how to have a grounded value of one’s company.
Reaction 3: Jaw-Dropping Shock (where did your mouth go?)
Sometimes, the raise and valuation make absolutely no sense together. Your mouth drops, gets on a rocket and flies to Mars looking for Martians to ask if they had anything to do with the pitch deck. Here’s a real example I got inFebruary: a MedTech company, pre-revenue, raising $50,000 and valuing the company at $100,000,000. You wonder if the founder is serious, understands basic math, or perhaps needs money to pay off a debt that is due. When I asked if they were serious and looked over the numbers, the answer was a resounding “Yes.” This means a $50,000 investment nets you less than 0.01% of the pre-revenue company. This founder needs more than just support and mentorship—they need a reality check.
So, what does this all mean? Well, the first clue is the founder’s valuation is just that. It’s your valuation as a founder. It can be backed by earthly logic or a concoction of stardust and martian math. It could be sound or ridiculous but it’s a founder’s view of their company and you have to respect that and consider that as an investor.
The second clue is the investor’s valuation. Ultimately, your company’s worth is determined by what investors are willing to pay, not what you think your business is worth. Your company might legitimately be worth $5,000,000, but if no one is willing to invest at that valuation, it’s not worth $5,000,000. It might be worth 80% or 70% of that.
Factors Influencing Your Company’s Valuation:
- Social and Political Climates: Valuations fluctuate based on these factors.
- Industry Trends: It changes based on your industry and it being hot or not at the time you are seeking an investment. For example several years ago it was ecommerce, then medtech (covid years), then electric vehicles, then crypto and block chain, and now it’s all about Artificial Intelligence (AI). 5 years from now who knows what it will be. So you have to be strategic.
- Partnerships and LOIs: The value of your company changes with partnerships and LOIs you may have in place. Have some solid partnerships that can show drastic growth and you can increase your valuation.
- Mentors, Network and Advisors: A strong network can open doors and enhance your company’s value. Never underestimate your network. It’s highly underrated but it’s a secret weapon and you should never be afraid to use.
- Sector-Specific Investors: Finding the right investor who invests predominantly in your sector is more likely to understand the value of your business over an investor who is sector agnostic. This also helps as investors who are sector specific have a ton of networks they can connect you with to help increase your business and valuation post investment.
- Market Feedback: Launching your product even an MVP, Customer positive feedback, CAC, Customer stickiness, ease of growth expansion, market trial data, and analytics. All these play a critical role in valuation enhancement.
Now to bluntly answer the question, “How much is my startup worth?”—it’s worth only as much as an investor is willing to pay at the time you’re seeking investment. It’s not about how much you think it’s worth. If you’ve studied negotiations, you understand anchoring and its pros and cons. Be cautious with your valuation; if it sends investors to the ER or Mars, you’ve likely lost them before you’ve even started. Do your research, be reasonable, and remember your valuation is probably going to be wrong since investors will do their own due diligence and calculations. Your key focus is to secure a meeting, and the way to do that isn’t by scaring them off. The way to do that is to be reasonable and flexible. If you found this helpful consider reading my award winning book “From Pitch to Close” for more advice, insight and how to start and build a high value company.
Pro Tip: On your financial slide, only state how much you’re raising. Leave the specifics of what the investor gets for the investment to a conversation. Your goal is to secure a meeting and sell the investor on your business. The deck is just the teaser to get the meeting. You are the closer that gets the funding.
Stay blessed.
Chris Folayan
Serial Entrepreneur and Passionate about helping people and founders