Valuation

What the greatest technology investors say about Valuation

Fred Wilson's Comfort Zones on Fundraising & Valuation

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“I'm all about “back of the envelope”.  I am old school but these are my comfort zones:

Build product - raise [$] 600k at 3mm post [post-money valuation] 
Build usage - raise [$]1.8mm at 9mm post 
Build company - raise [$] 4mm at 20mm post

I am not in my comfort zone these days.” [Wilson was referring to valuation-wise late 2011 and presumably early 2012 as well.] Fred Wilson Burn rates: How Much?  Comments, Dec. 12,  2011; http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

An Option Pool is about Price

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“One [] contentious [] negotiation [point] between an entrepreneur and a VC [], particularly [in] an early stage financing, is the inclusion of an option pool in the pre-money valuation. [] [The] fact [is an option pool] is simply about price.  [Example]:  [] $3.25mm pre-money with no option pool [can be equivalent to] $4mm pre-money with one. [] What an entrepreneur needs to do is find out what the market price for [his] company is with and without an option pool in the number. [Then], the negotiation over this point is [] less contentious.”

“[] [Wilson acknowledges that if] options are counted in the pre-money, entrepreneurs will want commensurately higher valuations to compensate for the additional dilution.”

“[][The] option pool request needs to be reasonable and based on [a] budget.  [Wilson looks for] enough options [in] the "pre-money pool" to fund the hiring and retention needs [] until the next financing.”  Wilson wants an option pool in the pre-money when he invests.  Fred Wilson, Valuation and Option Pool and comments, Nov. 6, 2009;  http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

There's No Science to Early Stage Valuation

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“There is no science to early stage valuation.  It’s simply a matter of supply and demand.  So generate a lot of demand and you'll get a good price.” Fred Wilson, Valuation and Option Pool comments, Nov 6, 2009;  http://www.avc.com/a_vc/2009/11/valuation-and-option-pool.html#comment-22043449

Two Rules of Thumb for Early Stage Fundraising

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[With a fast growing company], doubling employees year over year, adding users and customers [] very rapid[ly] [], [] don’t [] raise too much money.  [] [Otherwise] [the company] will be sitting on cash [] raised [at a lower valuation] [] [which is] too dilutive to [founders] and angels.

[Wilson has] two basic rules of thumb [for the amount to raise in early stages, i.e., seed, Series A and B rounds]. First try to dilute in the 10-20% band whenever you raise money.” 10% is preferable.  More may be necessary, “[] but try [] to keep [] dilution below 20% each round.  If you do two or three rounds [exceeding] 20% each round, you’ll end up with too little [equity].

Second, raise 12-18 months of cash each time you raise money.  Less than a year is too little. [] Longer than 18 months means you may [have cash when the company had at a lower valuation].

[] When [a] company gets above 100 employees and valued at north of $50mm, things change. You may need [] more cash [] for working capital [] and [the company] may not be increasing value [as rapidly as] when [it was] smaller.”  A raise of 24+ months cash may then be appropriate.  Fred Wilson, How Much Money To Raise, Jul 3 2011;  http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html

Fundraising Terms Pile Up with Later Stage Investors

Mark Suster Partner Upfront Ventures and former entrepreneur

“[] any [early stage terms] will certainly be asked for by future investors in [] later funding rounds so all of these terms pile up [after] 3-4 rounds of funding over a 5 year time frame. And by the time most companies get to an exit [which realistically is still 8-10 years,] often the founders own very little of the economic upside."  Mark Suster, Want to Know How VC’s Calculate Valuation Differently from Founders?  July 22, 2010

http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

 

Mark Suster: Valuation-What It Is & Its Ranges

Mark Suster Partner Upfront Ventures and former entrepreneur

 “Valuation = whatever an investor is willing to pay. Investors want to own 25-33% so it can be determined by how much you raise. [] early investors know how much they want to invest and what the norms are by stages. There are huge variances (and prices go up and down dependent on market conditions), but general guidelines on valuation:

angel: sub $1m
seed $1-$2.5m pre [pre-money valuation]
A round: $2-5m pre. Up to $7-8m for super experienced entrepreneurs
B round $7-12m pre. Outliers can be $20m pre. EXTREME outliers (see: FourSquare) can fetch crazy prices.
C round: 100% dependent on company performance.”

Mark Suster comments from Want to Know How VC’s Calculate Valuation Differently from Founders?, July 22, 2010;  http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/

No Great Science to Determining Valuations

Mark Suster Partner Upfront Ventures and former entrepreneur

 “There is no great science to [how prices (valuations) are determined].  The earlier [one] invest[s] the higher the chances the company won’t work out and thus [one] pay[s] a lower price than later-stage investors. [An investor tries] to pay the appropriate price for [his] perceived risks of the company succeeding and protect [himself  if] it isn’t quite as valuable as [he] had hoped.  As the risks [] get eliminated the higher the valuation investors are prepared to pay.”  These risks over time are “[first] product [], [then] market [], [then] growth/scale [] and [finally] monetization/competition [].”    Mark Suster, Why Startups Should Raise Money at the Top End of Normal  June  5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/

The Unwritten Term on the Term Sheet

Josh Kopelman Partner First Round Capital and former entrepreneur

“When a company gets a term sheet with a high valuation, [the entrepreneur] need[s] to pay attention to the unwritten term on the term sheet.”  The entrepreneur should be ok “with [an] exit multiple that would generate [] returns [] to satisfy [] VC[‘s]. While every situation is unique, here's a simple rule of thumb:

Series A – 10X
Series B – 4-7X
Series C – 2-4X ”

“[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.” Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html; file Josh Kopelman Unintent Moonst Unwrt;      http://redeye.firstround.com/2006/03/as_a_little_kid.html

Do More with Less Before Raising Outside Capital

Brian Garrett Co-Founder and Operating Partner Crosscut Ventures

“[To] increase your chances of success raising capital, it’s do more with less.  It’s get as far as you can on your own dime, on friends and family money [] before [raising] outside capital. That will lead to better valuations [and less dilution]. [] Not every business needs significant capital to hit milestones and be successful. [] [Your] chances of success increase by having hit some really meaningful milestones on your own dime.” Brian Garrett, Seed Capital from Angel Investors: Brian Garrett, Part 10; http://www.sramanamitra.com/2010/11/26/seed-capital-from-angel-investors-brian-garrett-co-founder-and-managing-director-crosscut-ventures-part-10/

Tranching Can Create Misalignment of Interests

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

Dixon says that tranching can create a misalignment of investors’ and entrepreneurs’ interests.  “[] tranching  refers to investments where portions of the money are released over time when certain pre-negotiated milestones are hit. [] In theory, tranching gives the VCs a way to mitigate risk and the entrepreneur the comfort of not having to do a roadshow for the next round of financing.  In practice, [Dixon has] found tranching to be a really bad idea.

[][Tranching] encourages the entrepreneur to “manage” the investors [hurting VC-entrepreneur relations, among other things].  One of the great things about properly financed early stage startups is that everyone involved has the same incentives – to help the company succeed. [] When the deal is tranched, the entrepreneurs ha[ve] a strong incentive to control the information that goes to the investors and make things appear rosy.  The VC in turn usually recognizes this and feels manipulated. [] There are better ways for investors to mitigate risk – e.g. lower the valuation, smaller round size.  But don’t tranche.”  Chris Dixon, The problem with tranched VC investments, August 15, 2009; http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments

The Company’s Stage: Weighing Investor Quality vs. Valuation

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

“The earlier stage your company is the more you should weight quality of investors vs valuation.  For a Series A, you are truly partnering with the VCs.  You should consider taking a lower valuation from a top tier firm over a non top tier firm (but probably any discount over 20% is too much).  If you are doing a post-profitable “momentum round” I’d just optimize for valuation and deal terms.”  [70 words]  Chris Dixon, Best practices for raising a VC round, May 4, 2011;  http://cdixon.org/2011/05/04/best-practices-for-raising-a-vc-round/

How Much Seed Money to Raise

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

The short answer for how much seed money to raise is “[] enough to get [a] startup to an accretive milestone plus some fudge factor” of say, a 50% round size increase.

““Accretive milestone” [means] getting [a] company [where it] can raise money at a higher valuation” and is a function of market conditions and the startup’s nature.  “As a rule of thumb, [] a successful Series A is one where good VCs invest at a pre-money [valuation] that is at least twice the post-money of the seed round.  So if [a] seed round [] raised $1M at $2M pre ($3M post-money valuation), [] the Series A [] should be [] a minimum of $6M pre (but hopefully [] significantly higher).

The worst thing a seed-stage company can do is raise too little money and only reach part way to a milestone.  Pitching new investors in that case is very hard; often the only way to keep the company alive is to get the existing investors to reinvest at the last round valuation (“reopen the last round”).  The second worst thing [] is rais[ing] too much money in the seed round [], hence taking too much dilution too soon.”

A startup should determine its expected biggest risk and how to eliminate that risk.  “For consumer internet companies [and SMBs (small/medium businesses)], eliminating the biggest risk almost always means getting “traction” – user growth, engagement, etc.[] For online advertising companies you probably want revenues.  If [] selling to enterprises you probably want [] credible beta customers.  

The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone.  Building a product is only accretive [] where there is significant technical risk []”.   Chris Dixon What’s the right amount of seed money to raise?  Dec. 28, 2009; http://cdixon.org/2009/12/28/whats-the-right-amount-of-seed-money-to-raise/