Startup Valuations: Why They Don’t Seem to Make Sense and How to Increase Yours

atrium.co

15 points·justin··4 comments

Hello HN! One thing early stage founders always ask is what the “fair” valuation is for their startup.

After years of doing this, the truth is that early stage valuations are more about negotiation, what’s market for other startups and what ownership percentage your investors want to achieve than they are about your business.

Once you realize they are fake, you realize the way to drive valuation is only to create a competitive market for your startups equity, by getting many investors to the table.

What this article did really well is explain how the size of a round is tied to its valuation. I often hear people wonder why a company raised so much or so little, whereas in reality, it was not their choice - how much they raised was dictated by what they were valued at and the ownership percentage the VC was targeting (which does vary, but like Augie said it's often in the 15-30% range).

What I wonder is if the pro rata rights play a role as well. When 30-40% of a later stage round is reserved for existing investors, will that have a positive or a negative impact on the valuation?

The lead investor typically negotiated for their own percentage and any pro rata rights on top of that will usually dilute the founders and any prior investor more, rather than dilute the lead investor.

I think there's also some anchoring bias that happens with easy mental math calculations like 20 on 80, or 40 on 360, since the financial fundamentals don't matter at the earliest stage companies.

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