How do you prepare your startup for early stage valuation?
I get questions around early stage and startup ventures all the time. I keep the ones that I think will help early stage companies with all the various challenges faced day-to-day while building towards the future. If ever you have a question you would like to send my way for a direct response, just drop me a note.
What’s in the early stage valuation for funding startups?
I’ll take “seed stage VCs” to mean traditional venture capital funds that do seed stage investments. The answer to your question probably changes if you are asking about the angel crowd. So here goes…
Early stage investors care about the market and the team.
There’s really not a lot else to go on (e.g., traction, metrics, business model, LTV, user acquisition costs, etc.) at an early stage. You can talk until you are blue in the face about how defensible the technology that you and another guy hacked together over a weekend is, but no one cares. If you can build it in a weekend, so can someone else. Save your breath and the investor’s time.
Each VC fund has their own checklist, but here are some ideas.
First, what is the market size or potential? If the market is huge, or has the potential to be huge (i.e., $1B+), then there is an opportunity to build a big company. If you’re contemplating a market that is smallish but is growing fast and has the potential to be huge (e.g., mobile advertising), that’s enticing as well. At the end of the day, traditional venture capital depends a lot on home runs, and this hinges to a large extent on targeting a large market. If you’re looking at a $50M market that isn’t growing, that’s a “pass,” because even if you grow to own 50% of the market, that means you only have a $25M business. Angels can play for singles and doubles, but VCs have LPs to answer to, which means they have to swing for the fences. You don’t swing for the fence while showing bunt.
Second, does this company have the potential to be the #1 or #2 in a big category? It turns out that a lot of the value in markets go to the market leaders (e.g. Facebook in social networking, Google in search, etc). Who’s the #6 player in e-commerce? I don’t know either. Investors want to invest in companies that either are, or have the potential to be, a market leader.
Third, but not least, the team. No matter how brilliant you are, there’s lot of smart people out there. Ideas aren’t worth the PowerPoint slide they are typed on. Execution is what matters. Most entrepreneurs and investors will probably tell you that companies tend to start and re-start or pivot a few times before they find their groove. This means that an investor has to believe that the founders have the ability to be stubborn when they should be and have the self awareness to pivot or go in a different direction when they need to.