Startup Valuation 101: How to Set and Justify Your Startup’s Valuation

Amir Shevat
8 min readSep 17, 2024

As an early-stage investor, I meet 3–6 startup founders every day. While most early-stage founders find it easy to pitch their startup idea, they stumble when it comes to *valuation. Founders often struggle to figure out the value of their company. I often run into answers like, “We don’t know,” “We’re still figuring it out,” “We’re thinking <too high or too low number>,” or the absolute worst, “We’ll let the lead VC set that number.”

Setting the initial valuation of your company is critical but challenging. You don’t have much data to base your decision on, and you hear a lot of conflicting opinions. Setting it too low means giving away a large chunk of your company for a small amount of money. Setting it too high might mean not being able to raise or setting overly high expectations for the next phase of your company. We’ll discuss these downsides in length later in this article. Letting the lead investor set the valuation is absolutely silly — like a store letting customers set the price of things they buy. Good luck with that.

So, how do you set the valuation of your early-stage startup?

One serial entrepreneur told me his golden rule: “Raise as much as you can, for the highest valuation you can.” This is based on the deep truth that value is in the eye of the beholder. If you can pitch your startup idea in the right way and get investors excited enough, they will pay any price you ask. While this is true, it’s not very practical, and there are methods you can use to base your valuation, even before product and market fit.

Figuring Out Your Startup Valuation

Here are two methods I see being used most often:

Method One: Calibrate/Compare With Similar Startups

This method is straightforward. Ask around — talk to other founders with similar skills and similar businesses. Don’t be fooled by the flashy deals you read about in the news. Instead, find a number by calibrating with founders who share the same seniority and experience.

You can also talk to friends in venture capital and ask them what average valuations they are seeing in the market. For example, at the time of writing this article, I’m seeing average valuations of $10M-$20M for early-stage startups with an early product, at the pre-product-market-fit stage. This gives you a ballpark number to aim for.

The downside of this method is selection bias. If you choose founders who are more advanced than you in seniority or product validation, you might be calibrated too high. If you talk to people who are less advanced, you might be aiming too low. Also, people might lie to save face or just to make themselves feel good. A good way to mitigate this risk is to gather a large sample and critically calibrate your position in the market compared to the data you receive.

Method Two: Multiply The Amount You Want to Raise by 4–6

This method is based on the fact that most funds want to get between 15%-25% of your company in each significant investment they make. So, figure out how much money you want to raise (I’ll cover how to do that in a different article) and multiply that by about 4 to get the low range of your valuation, and by 6 to get the top range.

Here’s an example:
You did the math and calculated that you need to raise $3M in this funding round.

Your startup’s top-range valuation is $3M x 6 = $18M.
Your startup’s low-range valuation is $3M x 4 = $12M.

If you want to be aggressive, ask for something closer to an $18M valuation. If you want to be conservative, aim for something closer to $12M.

This is, of course, a ballpark figure and open to negotiation, but it gives you insight into how investors think about valuation ranges. When founders use this math, it intuitively makes sense to me.

Justifying Your Startup Valuation

Now that you’ve figured out how much you want to raise, here are a few ways you can justify your valuation. The key here is to de-risk the investment and create excitement by providing proof points that support your valuation claim.

Justifying Your Valuation With Founder Track Record and Market Fit

We always hear about this method’s outcomes in the news. A well-known founder who previously founded a well-known startup is raising gazillions of dollars at a multi-gazillion dollar valuation. The problem is that these articles set unrealistic expectations and lead to endless frustration for founders who expect similar outcomes.

This method is fantastic if you’re a successful serial entrepreneur (you founded Slack, for example), or you’re an executive at a hot company (you led research at Google, for example) — you have proof points that you can execute well.

However, this method doesn’t work for most early-stage entrepreneurs. Investors don’t want to pay a premium for an unproven team starting a risky business. I’ve met founders who asked for very high valuations and were deeply frustrated by the endless stream of NOs they got.

Justifying Your Valuation With Product Track Record

In this method, you try to create as much progress as possible in building a useful product and validating it with customers before raising funds. A common example I see is founders creating an open-source project that blows up and becomes super popular, translating that market validation into a high valuation. For example, 100K stars for your open-source project can equate to a 5K in future customers with the assumption of a 5% conversion.

Both this method and the previous one are based on creating proof points that de-risk the investment for your investors. Lower risk equals a higher probability of getting the valuation you desire.

Justifying Your Valuation With Customer Research

If you don’t have a product and your product requires major funding to be built, you might use market research as a proxy for market validation. I love it when pre-product startup founders show me mockups of their product and tell me they talked to 30 prospective customers, getting 7 of them to commit to using it and providing feedback.

Customer research reports show investors that the founders have what it takes to envision, spec a product, engage with customers, sell them on the vision, and finally collect the data to create a compelling market validation report.

Common Pitfalls When Setting Valuations

Raising Too Little for a High Valuation

It’s counterintuitive, but raising too little at a high valuation (e.g., raising $500K at a $10M valuation) is very risky. The major risk is that you have relatively little money to deliver a lot of value, causing you to run out of money before creating enough value to merit the high valuation. You are then forced to raise more money at the same valuation (a flat round) or, worse, at a lower valuation (a down round). Both paths are bad for startups, demoralizing investors and employees. Early-stage startups should always strive to raise enough money to bring the company to a stage where it is ready to raise the next round at a higher valuation.

The secondary problem here is that raising a small amount at a large valuation does not fit the strategy of most funds who have a target ownership of 15%-25%. Making your deal a no go to many investors.

Giving Away More Than 30% of the Company in a Single Raise

This usually results from very low valuations, inexperienced founders, or aggressive early-stage investors. Giving away too much of your company early on is catastrophic — it means you’ll have less equity to give to future investors. It also gives too much power to a single investor who made a small investment compared to the total money the company will need to raise over its lifetime.

I’ve said no to several deals where the founders gave away too much of their company early on — because unfair ownership reduces the motivation of the founders, and sets the entire company on the wrong trajectory. I told the founders to talk to their previous investors and fix the cap table (a table detailing who owns how much) to give the founder a bigger stake in the company.

Asking for Too Low a Valuation

A low valuation leads to either high dilution (see the section above) or it means founders are raising a small amount of capital. I see many inexperienced founders raising too little, forcing them to go back to fundraising soon after. The less time you spend fundraising, the more time you spend building and talking to customers. Try to raise enough money for at least a year, preferably 18 months.

Asking for Too High a Valuation

There are two risks here. One, investors might not want to pay that valuation, making it hard for you to raise. I met a great founder who asked for a high valuation and was surprised that while everyone was excited about what he was building, they ultimately said no to the deal.

Another risk is over-promising — when you set a high valuation, you’re essentially setting an even higher expectation for the next round. This puts pressure on you to deliver fast, which might not be the best approach for a business that would benefit from more steady growth.

Lastly, inexperienced founders, when given a large sum, might be tempted to spend it quickly, leading to high burn rates, frenzied hiring, and eventually layoffs and closures, something we’ve seen a lot of in 2023–2024.

Conclusion

It’s difficult to set and justify the valuation of an early-stage startup, mainly because founders don’t yet have data like usage, revenue, or prior valuations to base their current valuation on. Methods like calibrating with other founders or using a multiplier based on how much you want to raise can help you find a ballpark range. Using founder fit, product fit, and research can help you justify your company’s valuation.

At the end of the day, don’t sweat valuation too much — think of it as a negotiable range. Focus on building delightful products and delivering value to customers, and the valuation will follow.

*Note: Some people might comment that you might not need to set the value of your company by raising funds through a SAFE. While a SAFE doesn’t technically set the price of a startup, it usually has a Cap clause that sets the maximum valuation at which the investor’s funds will convert to equity. In my experience, this acts exactly like a valuation in the minds of founders, employees, and investors. For the sake of simplicity of this article, I will treat these as the same.

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Amir Shevat
Amir Shevat

Written by Amir Shevat

Investor in early stage startups. Previously: Head of Product, Twitter Dev Platform, VP product at Twitch, Slack, Google, Microsoft. Author at O'Reilly.