How to determine valuation of my start-up in 3-5 years for VC funding?

Valuation is in the eye of the beholder, and cannot be taken in isolation. When we say valuation is in the eye of the beholder, we mean that what a company is worth to me may be different from what it’s worth to you. I may have an idea or proprietary technology that will transform the company, whereas you may only perceive value in liquidating the company. Moreover, in VC deals, value is something that is negotiated, so a lot will depend on your negotiating skills. This is particularly true in the case of early stage companies, where profits (or even sales) have not yet started to roll in. There are many well known examples of very valuable companies that have not yet figured out a “revenue model”; they are valuable simply because they have a good story and a very credible management team.

Valuation is also something that cannot be taken in isolation. For example, you may be willing to give up a little in valuation in return for more control over the company (e.g. through board representation or veto rights). Alternatively, you may insist on a higher valuation if the VC asks for a higher multiple in terms of liquidation preference (i.e. the number of times the VC wants to multiply his investment before any proceeds of a sale go to the founders).

For early stage companies in particular, valuation is a very amorphous – and contentious – concept. The correct way to think about how to value an early stage company is “it depends”. While this may not seem like a very satisfying answer, if you adopt this approach you will find the fund raising process far more interesting.

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