I recently saw a pitch deck from a seed stage startup which had a small amount of revenue. The deck claimed a valuation of $50M because a similar company exited at that valuation. I asked about his valuation, and he said he claimed $50M because “that’s what my company will be worth.”
I reminded him that the example company who exited with a $50M valuation had $15M in revenue at the time of exit. He said, “I’ll have that too.”
I often see entrepreneurs calculating valuations for today’s fundraise using tomorrow’s revenue.
Today’s revenue determines today’s valuation. Your business tomorrow determines your valuation tomorrow.
Investors match investments with the current state of the business. As you increase sales, team, product, and IP, your valuation goes up.
The takeaway here is raise only as much as you need to get to the next level. Otherwise, you’ll be raising more funding on a lower valuation, which means you’re giving up more equity than necessary.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.