Tuesday 28 September 2010

How investors value startups

cats_2010-09-28_7Image by yousukezan via Flickr
Startup raise money in order to leverage their businesses. However when and how much to raise is always a source of misunderstandings and false expectations amongst founders. A road to break even can be divided in 4 stages, and investors value various stages in different ways:

1. Idea - valuation is 0, nada, null...I don't know how else  to put it, however ideas don't get financed. They're are a necessary element in one of the next stages, but on their own, they're practically worthless.

2. Technology/Product - up to a  few tens of thousands of dollars. In a few cases a bit more, but not much. This would a typically  be an angel round, where founders have some code and a prototype, but they need an engineer or two to get it a bit further.

3. Distribution - when the technology is ready and service/product done, you want this thing to spread like a virus. It might take to recode the service several times, change focus, poke the market.... You need to demonstrate that the thing is growing and gets used on a massive scale. This is quite often  a strong angel, or early stage VC stuff. If you're really successful, you'll raise up to 2M USD. More realistically you're looking between 0.5 and 1M USD.

4. Revenue - You need to have significant revenue, closing in on profitability with a reasonable team,  payed properly, 6+ guys, and you can already smell the profits in the following months. That's the VC's sweet spot. If you can show that by adding 2 sales guys or a product + sales guy or something in that sort, you can significantly increase revenue, you hit the jack pot. That's a proper A round and  you're looking at 3-5M USD.

That's it. As always, things are not black and white, stages overlap, however the concept is there. The lesson is that it's worth to set your expectations.
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1 comment:

markos said...

Probably worth mentioning that you are talking about web/software startups.

Other industries might need and can expect higher amounts at each stage.