{"id":10939,"date":"2017-01-02T12:30:18","date_gmt":"2017-01-02T12:30:18","guid":{"rendered":"https:\/\/smallbiztrends.com\/?p=425265"},"modified":"2017-01-02T12:30:18","modified_gmt":"2017-01-02T12:30:18","slug":"taking-the-valuation-curve-seriously","status":"publish","type":"post","link":"https:\/\/businessnewsbox.com\/?p=10939","title":{"rendered":"Taking the Valuation Curve Seriously"},"content":{"rendered":"

\"Taking<\/p>\n

Recently I was contacted by a founder who wanted me to invest in her startup. When she told me the status of her company and the valuation she was seeking, I told her it wasn’t worth investigating. She was looking for a $10 million valuation on a pre-revenue company<\/a>.<\/p>\n

That’s absurd. The biggest Unicorn around, Uber, raised money at a $4M valuation in its seed round.<\/p>\n

The exchange got me thinking. I should write a column that offers a rough guide to the relationship between valuation and traction for early stage companies.<\/p>\n

Try This Startup Valuation Method<\/h3>\n

This effort is very crude. It is only based on deals I have seriously considered and it doesn’t control for the variation in industry, size of market, capital requirements, team experience and so on. But here goes:<\/p>\n

In 2016 I looked at 120 companies on which I had data on both the founders’ expected valuations and their annual revenues at the time I made my investment decision. (As an aside, I received 340 pitch decks in 2016 and only thought that 120 companies fit my investment criteria enough to bother to ask for these two pieces of data.)<\/p>\n

The valuations of the companies ranged from $750,000 to $17.5 million. Annual revenues ranged from zero to $2 million. The median company had $24,000 in annual revenue, and a valuation or valuation cap of $3.5 million. The most interesting part of this data dive comes from looking at the relationship between the companies\u2019 revenue traction and their valuations. In the figure below I have plotted the valuation or valuation cap of the company on the vertical axis and the annual level of sales on the horizontal axis.<\/p>\n

The median valuation or valuation cap for a pre-revenue company that I took seriously in the past year was $1.8 million. For companies that had about $15,000 per month in revenue, that valuation was around $2 million. When the companies had hit about $30,000 per month in revenue, the valuation was about $2.5 million. The $3 million valuation is hit when the companies were a little over $50,000 per month revenue. A $4 million valuation occurs at around $80,000 a month in revenue. At a little over $100,000 per month in revenue, the valuations hit $5 million, and they reach $6 million at $125,000 per month in revenue.<\/p>\n

\"\"<\/a><\/p>\n

There are a lot of caveats in using this information. First, I am a single investor and I am more valuation conscious than many angels. Second, these numbers are medians. Founders with more experience, those in hot industries, and those with a lot of investor interest command higher valuations than others. But even if you consider those caveats, you can see that proposing a valuation or valuation cap of $10M on a pre-revenue company isn\u2019t going to get this investor to consider investing.<\/p>\n

Growth<\/a> Photo via Shutterstock<\/em><\/small><\/p>\n

This article, “Taking the Valuation Curve Seriously<\/a>” was first published on Small Business Trends<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

\"\"\/<\/p>\n","protected":false},"excerpt":{"rendered":"

This startup valuation method offers a rough approach using the relationship between valuation and traction for early stage companies.<\/p>\n","protected":false},"author":14,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[56],"tags":[],"class_list":["post-10939","post","type-post","status-publish","format-standard","hentry","category-small-business-advice"],"_links":{"self":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/posts\/10939","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/users\/14"}],"replies":[{"embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=10939"}],"version-history":[{"count":0,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=\/wp\/v2\/posts\/10939\/revisions"}],"wp:attachment":[{"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=10939"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=10939"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businessnewsbox.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=10939"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}