1. Working Backward From Your Next Round
Here’s a really handy rule: An investor wants to see you grow your valuation by 2-3x in 12-18 months. So, think about where you think you can safely get in 12 months, and then cut it by 3 (to be safe), and that’s a good starting point for what investors might be willing to pay.
2. Bottoms-Up Funding Needs
How many hires do you need? What are you planning on spending on marketing? While you don’t need a full-fledged financial plan at a pre-seed stage, you do need to have a sense of where you’re going to spend/invest the money you’re raising. You should have at least 18 months of “runway” after your raise. So, if you are going to spend $60K / month for the next 18 months, you need to raise $1M to give yourself enough time to prove out enough questions during those first 12 months, and still have enough of a cushion (6+ months) to allow for that next raise (assuming you hit all your milestones).
3. Market Norms
Compare yourself to market norms in the Goalposts for Funding Rounds and What a Pre-Seed or Seed Stage Company Looks Like in 2020. Make sure you’re not wildly off in “what you look like” vs “what they expect.”
4. Manageable Dilution
Avoid selling more than 20-25% of your company in all your rounds (combined) before a Series A. (If you’ve sold 40%, for example, then Series A investors will balk, since it means that after a Series A, investors will own 60% and the founders might only own 30-40% of their company with most of the work ahead of them.) So, whether that’s 5% in a Friends & Family + 15% in a Seed, or 15% in a Pre-seed and 10% in a Seed, or 20% in a Seed and skipping straight to a Series A, make sure that you and your team have enough skin in the game by the time you start raising your Series A.
Assess your valuation and raise based on the above factors, and play around with it to determine what your optimal path is.
5. The Soft Stuff
Because there’s so much risk and uncertainty at this stage, the investments are forward-priced, based on gut-level estimates from experienced angel and seed-stage investors. Even if it’s all numbers, this seed-stage valuation reflects — most of all — a signal of where your startup can ultimately go. But that also means that the wrong valuation can attract the wrong investors, which can put your startup on the wrong growth trajectory. The rule of “underpromise and overdeliver” is product advice, as always.
Because it’s so essential to get right and such a moving target, this is a moment to lean on a trusted guide. When it comes to calculating a valuation, accelerators and investors are great resources to turn to. But be warned: their answer may be biased, because they themselves may be seeking better terms for an investment. So, if possible, find someone unbiased who’s done this before whose judgment you value and believe in.