Valuation is one of the most important - and most misunderstood - concepts in startup fundraising. It determines how much of your company you’re giving away and sets the stage for future rounds.
But how do founders and investors actually arrive at a valuation? Here’s a breakdown of the most common methods used at different stages.
1. The Art (and Math) of Valuation
Early-stage valuations are more art than science. There’s no single “correct” number—just a range that reflects market appetite, traction, team quality, and investor expectations.
The methods below are often used in combination to arrive at a fair pre-money valuation.
2. Comparable Company Analysis
This approach looks at how similar startups are being valued in the market. Investors will ask:
- What stage are you at compared to peers?
- Are there recent deals in your vertical or geography?
- What multiple (e.g., revenue, users, GMV) are those companies getting?
This gives a ballpark - but beware: not all comps are apples-to-apples.
3. The Berkus Method (Pre-Seed/Early Stage)
Designed for pre-revenue companies, the Berkus Method assigns value to qualitative factors:
- Sound idea (basic value)
- Prototype or MVP
- Quality management team
- Strategic partnerships
- Product rollout or sales plan
Each factor might be worth up to $500K or $1M, giving a valuation range of ~$2M–$5M. It’s simple but useful for very early-stage conversations.
4. Scorecard Method
This method adjusts an average valuation for your geography/stage based on how your startup scores on:
- Team
- Product
- Market size
- Traction
- Competitive landscape
It’s often used by angel investors who want to sanity-check a valuation ask.
5. Discounted Cash Flow (DCF)
This is a more traditional finance method - projecting your future cash flows and discounting them to present value. It’s rarely used at pre-seed/seed stages due to high uncertainty, but may come into play for growth-stage startups with reliable revenue.
6. Venture Capital Method
Here, investors estimate:
- Your potential exit value
- Their expected return
- How much ownership they need to achieve that return
Example: If they want a 10x return and think the company will exit at $100M, they’ll want ~$10M of equity. If investing $2M, that implies a $20M post-money valuation (or $18M pre-money).
Final Thoughts
Valuation is a negotiation - and what matters most is how it aligns with your long-term goals. Don't just chase a high number. Think about:
- Dilution and control
- Follow-on funding
- Alignment with investors
Need help thinking through your target valuation? Legal and financial advisors can walk you through how terms like option pool, liquidation preference, and convertible notes affect the math.
Frequently Asked Questions
FAQs about Startup Valuations
How do investors decide which valuation method to use?
It depends on your stage. Early-stage investors rely more on methods like Berkus and Scorecard, while later-stage investors lean on DCF and comps.
Should founders always push for the highest valuation possible?
Not always. An inflated valuation can create problems in later rounds if you can’t meet growth expectations, leading to down rounds.
What role does traction play in valuation?
Traction is one of the strongest drivers. Revenue, user growth, and customer engagement make valuations more defensible.
How do terms like option pools and liquidation preferences affect valuation?
They don’t change the headline valuation but impact founder dilution and investor returns. This makes it critical to understand the full term sheet, not just the valuation number.
Don't DIY your legal anymore
Leave it to the pros.