Your valuation depends on your investor

The value of a for-profit enterprise is generally defined as the discounted value of all its future cashflows.

The problem with that neat sounding definition is that the earlier you get with a business, the higher the margin for error in estimating what the future cashflows will be. After all, there is no track record to judge. And without a track record, the whole exercise is rendered useless.

So the next best thing is to say that your valuations should be based on incentives. There can’t be too much dilution in ownership, because the founders will no longer have an incentive to grow their business, but there can’t be too little either, otherwise the investors will become disinterested.

I always say that you’ll probably give up roughly 20% of your company each time you raise a round of funding (sidenote: if you want to know the valuation of a start-up, in most cases you should look at how much they have raised and multiply that by five for a rough figure).

This raises a fascinating question: How much money can your start-up raise if your future cashflows are uncertain? The answer depends on who is interested in investing.

Through this year’s Startmate class, it’s been pretty amazing at the level of disparity in the “market” for start-up financing.

In Australia, you’ll get angel investors offering $100,000 at a $500,000 pre-money valuation. For those very same companies, US individual angel investors will usually push for $500,000 on a $2 million pre-money valuation.

More liberal angels are happy to contribute to $1 million rounds at a $4 million pre-money valuation because you have an early stage venture fund who’s willing to contribute most of the round. If that early stage venture fund is really interested, you can even push for $2 million on an $8 million pre-money valuation.

And this is all for the same companies, presented to different audiences.

The market for start-up financing may go higher or lower next year, but that’s not the point. Your valuation is a function of who your investor is. And that’s something you don’t need a sophisticated spreadsheet to calculate.