I hosted a guest lecturer today named Doug Rowan at Johnson (for those of you not in the Cornell ecosystem, “Johnson” is how the marketing department likes us to refer to Cornell’s business school). Doug is an older guy with lots of startup experience both as entrepreneur and investor. He currently mentors a lot of companies at the “tiny” stage.
Doug’s lecture was on startup company valuations. Here was his key takeaway: the best way to look at valuations of seed or Series A companies is to consider the amount being raised and the fact that the investors will want to own between 20% – 35% of your company after they invest (assuming a priced equity round). Period, the end. Yeah, it is that simple.
So, you want to raise $500,000, well guess what, your pre-money valuation will be between $930,000 and $2mm. You want to raise $1mm, then your pre-money valuation will be between $1.857mm and $4mm. You want to raise $5mm (big first round), well just do the math.
[desired %] = (Amt to be raised)/(X+Amt to be raised)
Just put in the “desired %” and “Amt to be raised” and solve for X. That is your pre-money (well at least one end of the range). Doug’s view point is often right.