Startup valuation 102: Don’t sweat the valuation

If you are raising capital for your startup, read my post “Startup Valuation 101“. But don’t get obsessed with your valuation…

Many entrepreneurs and investors agonize over valuations. After all, valuations impact how much each party earns if the company gets acquired or goes public. But some take it too far. I recently read an insightful blog entry by Paul Graham, successful entrepreneur and founder of business incubator Y Combinator:

“There is no rational way to value an early stage startup. The valuation reflects nothing more than the strength of the company’s bargaining position…Ultimately it doesn’t matter much. When angels make a lot of money from a deal, it’s not because they invested at a valuation of $1.5 million instead of $3 million. It’s because the company was really successful. I can’t emphasize that too much. Don’t get hung up on mechanics or deal terms. What you should spend your time thinking about is whether the company is good. Similarly, founders also should not get hung up on deal terms, but should spend their time thinking about how to make the company good.[1]

 


[1] http://www.paulgraham.com/angelinvesting.html#f1n

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3 Responses to Startup valuation 102: Don’t sweat the valuation

  1. Boris says:

    Good point. But how DO you value your start-up? I just got off the phone with a VC and had to talk about the valuation of TwitterCounter (at which you are featured which is how I ended up here) and I’m not sweating my valuation as much as I’m sweating the fact that I have to come up with one.

  2. Stop Sweat says:

    Thanks for this great post Im pretty sure that many people are searching informative post like yours .

  3. Paul Graham is, of course, right: the obsession should be with driving the valuation factors, which they can control, not the valuation number itself, which they cannot control. Like Graham says, if the number is in the range, take the deal and move on. But startup founders seldom think through the endgame from the VC perspective…the fact that any successful startup will have multiple rounds, that they are all together building the bigger pie, and that windows of opportunity close, so speed is of the essence. So back to those valuation factors: a great team, proven product concept, fanatical customers and the buddha-like peace of cashflow.

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