I hosted a guest lecturer today named Doug Rowan at Johnson (for those of you not in the Cornell ecosystem, “Johnson” is how the marketing department likes us to refer to Cornell’s business school). Doug is an older guy with lots of startup experience both as entrepreneur and investor. He currently mentors a lot of companies at the “tiny” stage.
Doug’s lecture was on startup company valuations. Here was his key takeaway: the best way to look at valuations of seed or Series A companies is to consider the amount being raised and the fact that the investors will want to own between 20% – 35% of your company after they invest (assuming a priced equity round). Period, the end. Yeah, it is that simple.
So, you want to raise $500,000, well guess what, your pre-money valuation will be between $930,000 and $2mm. You want to raise $1mm, then your pre-money valuation will be between $1.857mm and $4mm. You want to raise $5mm (big first round), well just do the math.
[desired %] = (Amt to be raised)/(X+Amt to be raised)
Just put in the “desired %” and “Amt to be raised” and solve for X. That is your pre-money (well at least one end of the range). Doug’s view point is often right.
ithaca VC 
It is that simple indeed. The problem comes later when the founder has to defend the valuation and he needs that money. How can you defend a valuation calculated with this formula? I think this problem is encountered by many founders that do not want to give away too much equity but they have no clue on how to defend a valuation. We at Equidam provide an easy way to do exactly this. With a 10 pages report, the entrepreneur and the investor can negotiate on specific assumptions and not on the respective feelings.
If the entrepreneur can validate the need for $10mm, that is awesome! It is the validation that is hard.
Wouldn’t you still need to get to a reasonable valuation if the amount of money you’re trying to raise is somewhat fluid? From an entrepreneur’s perspective, if I’m giving away 20-35% of the company /no matter what/, then what prevents me from simply trying to get the most bang for my buck (i.e., asking for more)? Doesn’t this kind of simplistic calculus work against a VC’s interests when dealing with an honest and thrifty entrepreneur?
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ithacaVC” was spot on! Icouldn’t agree with u even more! Finally looks like I personallyuncovered a site very well worth reading through. Thank you, Eldon