Channel your Inner VC to Understand Startup Valuations

I think Joe missed one of the crucial considerations in valuation... How many doors you close with a high valuation.

If you close $3m on a $10m post-money valuation, you're signing up to build a $100m company (see http://www.angelblog.net/VC_Mandatory_Moonshot_The_Unwritten... ). If things aren't going great (i.e. growth has plateaued), you MIGHT be able to sell for $50m.

This is especially true if you take money from a BIG venture fund (who has $500m under management and needs to see BIG exits to move the needle).

Looking at the chart here ( http://redeye.firstround.com/2007/07/the-unintention.html ), the vast majority of exits are under $100m... Which means that committing yourself to be north of that means a long road and a lot of risk.

This post helps raise some of the issues. I agree with webwright that it's just one factor though. It seems like considering pre money valuation as an output aligns you with the kind of thinking on the other side of the table - though I'm not an investor so can't really say.

That said, the big one seems to be finding an investment partner that you really like, that will be there through the ups and downs and who has well aligned motives.

Either way, what I can say from experience is that it is very useful to understand how the math works backwards and forwards. Investors go through this many more times then we do as entrepreneurs. So the better you understand the financial administration aspect of raising money the easier time you'll have when the conversation goes there. And you do want it to go there.