Ask YC: I'm pitching to an angel. How do I value my startup?

#1

Post by hacker64 » Sat, Jan 19, 2008, 3:08 AM UTC

I have a meeting with an angel investor soon and he wants to know at what valuation I'm asking him to get in. I guess this is the pre-money valuation. My startup has two people, both programmers, and we've been working on it for 6 months now. We have a web site online and it's starting to grow, but it's not big by any means, although the potential could be huge.

Any advice, resources, or tips on how to come up with the right valuation? Should I ask for a very high number and be willing to negotiate down? Or should I set a value and stick with it? Thanks everyone.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#2

Post by rms » Sat, Jan 19, 2008, 3:18 AM UTC

How much money are you trying to raise?

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#3

Post by hacker64 » Sat, Jan 19, 2008, 3:25 AM UTC

rms wrote: post #2

How much money are you trying to raise?

We have a low burn rate, so a $100K should be enough to allow the two of us to continue working on it for another year, including a small marketing budget, and occasionally bringing in a consultant for the things we need help with (graphics, marketing consultations, legal, ..etc).

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#4

Post by mattmaroon » Sat, Jan 19, 2008, 3:42 AM UTC

Don't. Say something like "I want to keep x% of the company". Thus if you end up getting more funding than you initially expected (happens often) you'll essentially get a higher val.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#5

Post by mattmaroon » Sat, Jan 19, 2008, 3:44 AM UTC

hacker64 wrote: post #3

rms wrote: post #2

How much money are you trying to raise?

We have a low burn rate, so a $100K should be enough to allow the two of us to continue working on it for another year, including a small marketing budget, and occasionally bringing in a consultant for the things we need help with (graphics, marketing consultations, legal, ..etc).

I'd also shoot for more than a year's expenses. I've found investors like to hear you're aiming for 18-24 months. Consider that you have to essentially start seeking funding 6 months before running dry. If you aim for 1 year's expenses you work 6 months, then start on fundraising. Raise 18 months' expenses and you work for 12 before fundraising again, so you get double the progress for only 50% more money.

And if you can raise $100k, you can almost certainly raise 150.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#6

Post by hacker64 » Sat, Jan 19, 2008, 3:53 AM UTC

mattmaroon wrote: post #4

Don't. Say something like "I want to keep x% of the company". Thus if you end up getting more funding than you initially expected (happens often) you'll essentially get a higher val.

That's an interesting twist. Thanks. Is it common?

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#7

Post by iamelgringo » Sat, Jan 19, 2008, 3:56 AM UTC

[disclaimer]Mind you, I'm on the outside looking in. I really haven't started the startup funding shuffle yet, but I've read compulsively. And, this is what I've gleaned. YMMV.[/disclaimer]

First, a few important questions.

Do you have revenue? How many users? How fast have your been growing? Proprietary patentable technology, or a user focused tool built on open source? I'd say that how many people are on the team, and how long you've been coding is rather unimportant. What is most important is what you have in hand.

What is a startup worth? Ultimately what the market is willing to pay for it. So, it's worth whatever you're willing to sell a stake of it for, and whatever the angel is willing to buy a stake for. It all depends where the investors and the market are at in the greed fear continuum. Right now, I get the impression that we're towards the end of the greed spectrum, and we'll be swinging back to fear soon. I know that's not very helpful, but ultimately it's all voodoo and people's best guesses. But, there are a few guidelines.

It helps to have a base case. Take for example YC funded companies:

Y Combinator offers $5,000 n + $5,000 where n is the number of founders for a 5-20% stake in a startup. That's usually for a group of founders with an idea, a prototype or maybe a little bit of code and a few users. That means that 0-6 months ago, had you been funded by YC, here's what your company would have been worth:

$5,000 x 2 founders + $5,000 = $15,000 for a 5-20% stake in your company. If $15,000 is worth 5-20% of your company, that means that your company was worth $75,000 to $300,000. Here's the formula:

startup value = investment/stake

or in the above YC case:

value = $15000/5% = $75000 at the low end

or

value = $15000/20% = $300,000 at the high end

Does this make sense? Someone please correct me if I'm wrong, but this is pretty much how I understand it's done.

If you have more traction than a typical YC group, i.e. more users, unique technology, revenue streams, strong code base, etc... Then, you're probably worth more than the $75,000 - $300,000 valuation. If you have more traction, you're probably looking at a 300,000 - 1,000,000 valuation. If you have less or as much traction, you're looking at the YC range.

Anybody else have any thoughts on the matter?

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#8

Post by mattmaroon » Sat, Jan 19, 2008, 3:58 AM UTC

hacker64 wrote: post #6

mattmaroon wrote: post #4

Don't. Say something like "I want to keep x% of the company". Thus if you end up getting more funding than you initially expected (happens often) you'll essentially get a higher val.

That's an interesting twist. Thanks. Is it common?

Yeah, if you read all the sites about raising money, you'll see that pop up in a few spots.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#9

Post by mattmaroon » Sat, Jan 19, 2008, 4:04 AM UTC

iamelgringo wrote: post #7

[disclaimer]Mind you, I'm on the outside looking in. I really haven't started the startup funding shuffle yet, but I've read compulsively. And, this is what I've gleaned. YMMV.[/disclaimer] First, a few important questions. Do you have revenue? How many users? How fast have your been growing? Proprietary patentable technology, or a user focused tool built on open source? I'd say that how many people are on the team,…

Y C can command lower valuations (though I don't think they really take advantage of it) than most other investors due to their incredible value add, which may actually be the highest in the industry. There are probably zero investors who are going to put as little as $100k into a company that come anywhere close. So out of the gate I'd require a higher valuation from other investors.

Re: Ask YC: I'm pitching to an angel. How do I value my startup?

#10

Post by freikwcs » Sat, Jan 19, 2008, 4:04 AM UTC

Often the usual response is something similar to "we are anxious to go through a formal valuation process should we determine this is an appropriate possible investment." It's certainly a bit of a chicken answer, but you can provide numbers such as revenue, product developments, and users to give an idea of what a proper valuation would be. The idea is to not price yourself out of their range during the first conversation.