What is a “fair” valuation?  (Greg Brown, March 15, 2013)

I am often asked questions related to the valuation of early stage companies. These typically come from an entrepreneur who is trying to understand what a “fair” valuation would be for a capital raise from angel investors.

The answer is really simple. Like it or not the valuation of a start up to early stage venture is subjective rather than objective. The investor(s) want to receive what they consider to be a meaningful but not controlling interest in your venture. This will be based upon emotion and perception rather than a discounted cash flow analysis.

Of course, as an entrepreneur you need to and will paint the picture of the lavish returns that the investor will receive when the hockey stick takes place and the business is delivering huge profits. As you are doing this keep in mind that every deal that the investor is considering has projections that look more or less like yours, so these spreadsheets are somewhat meaningless.

If the amount of money being raised is going to allow your company to accomplish something meaningful (get product to market, significantly expand, etc.), you should probably be prepared to give those who provide the capital something in the 15% – 30% range in exchange for the needed fuel. Those aren’t hard and fast figures, but it’s a reasonable ballpark for you to be thinking about as you consider your options.

A related but slightly different topic is the over-emphasized impact of dilution, but I’ll save that for another day and another blog post.