Valuation
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The estimated worth of a company, determined during a funding round by negotiation between founders and investors.
Valuation is what investors agree your company is worth when they write a check. It determines how much of the company they get for their investment. A $10M investment at a $40M pre-money valuation gives the investor 20% ownership ($10M / $50M post-money).
Startup valuations are not based on discounted cash flows or asset values. They are based on comparable companies, growth rate, market size, and negotiation leverage. A company growing 3x year-over-year gets a higher revenue multiple than one growing 1.5x, all else being equal.
Valuation is not the only thing that matters. A higher valuation means less dilution for founders, but it also sets a higher bar for the next round. A $100M Series A valuation means you need to justify a $300M+ valuation at Series B. If you cannot, you face a down round.
Examples
A startup negotiates its seed valuation.
The founders want a $15M pre-money valuation. The investor offers $8M. They settle at $12M. The investor writes a $3M check, owning 20% of the company ($3M / $15M post-money).
A high valuation creates a high bar.
The company raised a Series A at $100M valuation. Eighteen months later, growth has slowed. The Series B would be at $80M, a down round. The founders choose to extend the runway instead of raising at a lower valuation.
Comparable companies influence valuation.
The company is at $5M ARR growing 200%. Similar companies at this stage have raised at 20-30x ARR multiples. The founders use these comps to justify a $120M valuation. The investor agrees because the growth rate is in the top quartile.
Frequently asked questions
How is a startup valued before it has revenue?
Based on the team's track record, market size, comparable company valuations, investor demand, and qualitative factors like product uniqueness. Pre-revenue valuations are more art than science. A strong founding team in a hot market commands a premium.
What is a reasonable valuation for a seed-stage startup?
In 2024-2026, seed valuations typically range from $8M to $20M pre-money for software startups, depending on the team, market, and traction. Hot markets (AI, developer tools) command higher valuations. The range varies significantly by geography and sector.
Related terms
The value of a company before receiving investment in a funding round.
The value of a company immediately after receiving investment, calculated as pre-money valuation plus the investment amount.
A valuation method that expresses a company's worth as a multiple of its annual revenue, commonly used for SaaS companies.
A non-binding document outlining the key terms of an investment, including valuation, board seats, and investor rights.
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