Thread by @dunkhippo33

Some thoughts on early stage valuation:

1) First and foremost, valuation is not actually about how much your company is worth.

2) Obviously if you have zero rev and you have raised money at a $4m post money, you are not currently worth $4m.

3) And using the public equities definition of market cap doesn’t hold either. A mkt cap of $50b in public equities is a reflection of how much investors believe your total revenues can amnt to.

4) So the best descriptor of what I think early stage valuation is - it’s just a supply and demand problem. Supply of your round and investor demand of your round.

5) If you are raising say $200k and you have $500k of investor interest, your valuation can be bid up. If you are raising $2m and no one is interested, then your valuation is...well $0.

6) So it’s less about your “actual” worth and more about what investors want to pay.

7) One could argue “well, what investors want to pay is based on what they think you are worth.” And that’s both true and false.

8) Where it’s true: the more proof pts you have per your idea, the more investors will be interested, the more you can bid up the valuation. ( most early stage investors weight how big an idea is >> traction. But for two of the same idea, more traction is better.)

9) Where it’s false: let’s say that two funds are interested in the same company. 1 is a $100m fund. The other is a $1b fund. The latter is willing to pay a higher valuation, because this round is an option for the next. The former fund has to buy as much equity as possible now.

10) So you can see that willingness to pay higher valuations is not just about you as the company but also about the investor.

11) Another criteria is how valuable an investor is beyond money - a past portfolio co had two terms sheets: one from A16Z and another from someone else. In this case, A16Z was the lower valuation. The founder took it because he knew they would be really value add.

12) Lastly, sometimes investors are willing to pay a higher valuation to buy a logo or network w either the founders / investors in that round. This has nothing to do w the details of the business itself.

13) So as you think through valuation - it’s less about how much am I “worth” and more about a) which investors do I want to work with? b) how quickly do I want to raise? c) how do I create a good supply vs demand dynamic in my round?