What’s the best way to think about the valuation of your company?

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Some Thoughts On The IPO Market For Web Companies – AVC

It is not healthy for companies to trade at prices well beyond what they are worth. It puts incredible pressure on the team to deliver results that can’t be delivered. And when the stock inevitably comes back to reality, the team feels like they somehow failed. Morale is impacted. The whole things is madness. And who benefits from that first day pop? Only the best customers of the banks who led the offerings. Why should they get a windfall when t… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Guest Post: Beware The Post Money Trap – AVC

If you do a Series A with a $50 million post-money, it means you have to build something that people will consider to be worth $50 million when you next raise money. Now if your company hits a great growth trajectory and the financing environment stays as it is then great. But if either of those two conditions are not met you will find yourself in the post money trap.

Paul Graham (Co-Founder & Partner at Y Combinator)
How to Raise Money

You have to be careful to avoid raising the first from an over-eager investor at a price you won’t be able to sustain. You can of course lower your price if you need to (in which case you should give the same terms to investors who invested earlier at a higher price), but you may lose a bunch of leads in the process of realizing you need to do this. What you can do if you have eager first investors is raise money from them on an uncapped converti… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
What Can It Be Worth? – AVC

So when valuing a venture stage opportunity, you have to imagine the product can scale to be used by many more people, or companies, or both, than are using it now. For that exercise, you need to study the product, the roadmap, and the use cases and be sure that your imagination is possible and not delusional. You also need to figure out what an annual revenue per user (ARPU) might be and apply that to the potential size of the market. Then you n… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
On Getting An Outside Lead – AVC

There are some “truths” in the venture capital business that I have been hearing since I got into this game in the mid 80s. One of them is that getting “third party validation” by going outside of the current investor syndicate to find a new lead is good for the investors. I have come to believe this “wisdom” is nothing more than lack of conviction on the investor’s part.

Bruce Gibney (Former Partner @ Founders Fund)
Peter Thiel’s CS183: Startup – Class 8 Notes Essay

Higher valuations aren’t always in your interest. Valuations that are too high will deter other VC firms from investing. And they will expose you to all sorts of problems regarding compensation and expected future returns for your employees and investors.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
The Valuation Trap – AVC

So the moral of this story is that you can push valuations when you have investors knocking down your door, but unless you are cash flow positive and expect to remain so for the foreseeable future, you do that at your own risk. You will need to find someone to top that price down the road and that person may not be there.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
My Nightmare – AVC

Valuation is just a number. It’s the price you pay for your shares. You don’t know if you got a good deal for a while, but eventually you will know. But valuation is also a psychological thing. It says how much you value a person. How much an entrepreneur is valued in the market. And how much an investor is valued in the market. The clearing price reflects both sides of the transaction.

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Valuation vs Ownership – AVC

You might ask “how can taking $2mm for 20% be better than taking $5mm for 20%?” and you’d be right asking that question. The answer is you can get the other $3mm later at an even higher price. That has been the history of many of our investments.
We recommend that entrepreneurs keep the funding amounts small in the early rounds when the valuations are lower and then scale up the amounts in the later rounds when it is a lot more clear how money c… (read more)

Fred Wilson (Co-Founder and Partner at Union Square Ventures)
Growth Is A Bitch – AVC

Companies are worth a multiple of their earnings and that multiple is directly related to earnings growth rates. When you are growing rapidly, you are worth more.

Amir Elaguizy (CEO Cratejoy, YC Alumni)
58 things I learned at YC – Giftshop Scientist

Don’t optimize for valuation

Justin Kan (Partner at Y Combinator)
The Founder’s Guide To Selling Your Company

Investors value companies based on either their financial value or their strategic value. It is much more likely is that your startup will be valued based on where it fits in with the acquiring company’s short or long term strategy. Here are some surprisingly common reasons your startup has strategic value to an acquirer: The CEO finds it interesting, or wants to keep it away from another large tech company. The executive that runs the relevant d… (read more)

Justin Kan (Partner at Y Combinator)
The Founder’s Guide To Selling Your Company

There is no “right” price for a company, there is only the price that you can negotiate. Ultimately, though, the clearing price for a startup depends on what the big company can justify to the market (previous comparable acquisitions are a good benchmark) and the sale price agreed to by you and your investors.