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- ♞ How to choose your valuation
How to choose your valuation
Especially in the early stages of a company, your “valuation” isn’t as much about how much your company is worth as it is about setting a valuation that fits your funding needs. There is a reason that all pre-seed/seed companies tend to raise similar amounts at similar valuations despite having wildly different potentials, risks and needs.
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The recipe to finding your valuation is simple:
Determine the next “accretive milestone”. This is the next milestone that your company needs to hit to significantly increase its value.
Determine your burn rate. This is the amount of money you will spend each month as you work towards hitting that accretive milestone.
Determine how many months it will take you to hit your accretive milestone.
Add an additional 20% to the amount you will burn before you hit your accretive milestone.
Your burn + 20% = the amount of money you need to raise.
In your pre-seed round, you should be giving up 15-25% of your company. So, to determine your (post-money) valuation, multiply the amount you need to raise by 4 to 6.5. The higher the multiplier, the harder it will be to raise since you're giving VCs a smaller share of the company.
Do you use this formula to value your company? |
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