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Valuation for startups, how do you approach it?
I'm curious on two fronts here:
1) Do you view valuation as a useful KPI for your startup, tracked internally, to measure success across a range of metrics?
2) How do you approach valuation? Do you prefer to consider simple multiples on future ARR, or are you looking at some of the startup oriented qualitative methods?
The last year has been a rollercoaster for startup valuation, and my own feeling is that is partly because founders haven't been too concerned about that process - mostly leaving it up to investors.
As we come out of this downturn, with many startups facing real difficulty as investors recover from their own recent overspend, founders should have a keener view on valuation - and the market overall should probably adapt to a more rational approach for pricing equity.
Curious to see how others here perceive this question, especially as this is a community of budding founders, potential future founders, rather than people who have been in the game for years already.
Thank you all!
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Brian Regan
Obviously, everyone wants their valuation to go up 😃 but I don't think valuation is a great KPI. Valuation is an outcome that is determined by how well your team executes on your KPIs + other influences (market, investor confidence, etc.)
Instead, I would build a set of KPIs that align with your company having the best possible valuation if you hit those KPIs. Things like new revenue, net revenue retention, customer counts, and product usage metrics.
Hitting these KPIs will help you fight any negative external factors like the state of the market or investor confidence AND will help you build a solid business.
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@brian_regan Interesting! Thanks for the input.
It seems like valuation is something like a meta-KPI, giving you an overview of performance generally.
Of course that’s distorted when valuations get skewed by market considerations, but a rational valuation is quite a good measure of growth.
This is an interesting question - thanks for asking! It sounds like 1) and 2) allude to founders calculating their own valuations - which is probably not the best usage of time compared to other activities that grow the business.
I just say this because, in general, no matter how thorough you are about calculating your valuation, 3rd party valuations are most meaningful when talking to anyone (investors, potential new hires, etc.) and for pricing equity.
If you're giving a valuation that you calculated, it's inherently biased - doesn't really matter if it's being used internally or externally 🤷
Just my thoughts!
@adamthecreator I think as long as the assumptions are driving the valuation are clear, it’s a useful exercise. But indeed, all valuations produced by investors and founders have an inherent bias.