TL;DR -
if >1M ARR: $20M-$50M
if 400k-1M ARR: $15M-$25M
if <400k ARR: $6M-15M
For Companies with $1M ARR and Growing
Baseline Valuation: Use 12-month forward revenue multiplied by 7-8X as a standard benchmark. This reflects current public market comparable multiples for enterprise companies.
Helpful Resource: Sammy Abdullah’s Medium posts provide insights into key factors like multiples, gross margins, payback periods, and cash efficiency.
Negotiation Strategy
Start with the First Term Sheet:
Use the first lead investor’s term sheet as a starting point.
Present the deal to at least six other lead investors to encourage competition.
Don’t Accept the First Offer:
Finding the right partners is as important as getting a good valuation.
Encourage Competitive Bidding:
Additional lead investors often compete on price, increasing your valuation.
The original lead investor, having done their diligence, will likely adjust their offer to remain competitive.
Set Realistic Expectations
Aim for a valuation that allows you to 3x your company’s value within 18-24 months.
Example:
A $50M starting valuation makes it harder to grow to $150M.
A $20M starting valuation makes a $60M target more achievable.
For Companies with $400K to $1M ARR
What Justifies a Higher Valuation?
Time to $400K ARR: Faster timelines show stronger traction.
First Non-Network Customer: Demonstrating traction through either:
Exceptional Hustle: Examples include closing a high-profile angel investor or landing a major customer through persistence.
Scalable Strategies: Creative customer acquisition methods, such as Brex’s champagne bottle strategy.
Typical Valuation Ranges:
$15-20M for companies with scalable strategies or creative acquisition stories.
$20-25M for companies growing 30%+ MoM over the past three months, indicating potential to reach $1M ARR within 3-4 months.
For Companies with Sub-$400K ARR
Typical Valuation Ranges:
$10-15M for companies growing at 50%+ MoM.
$6-10M for slower growth, depending on lead investor preferences and strategy.
Angel Investors: How to Approach Valuation
Valuations between $4-6M matter less; focus on getting in early.
Negotiation Levers
Offer the last round’s valuation cap to incentivize participation.
Highlight pro rata rights for institutional rounds.
Valuation Strategy
Start at $6M and adjust based on feedback:
Price Pushback: Use a personal touch: “For you, as a long-term partner, the lowest I can go is $5M before our institutional round.”
Traction Questions: Ask how much traction they’d need to see to continue the conversation. If they anchor high, say no promises but prioritize lead investors with similar benchmarks who might take the full round.
Team Concerns: Hedge risks by outlining plans for hiring or creating an advisory board.
Watch for Higher Valuations: Anything in the $7-10M range may align too closely with institutional round valuations, reducing the incentive for angels to invest early. Anchor lower to maximize interest.
Don’t Overhype: Aim low and focus on realistic milestones to build credibility.
General Tips for Founders
Avoid inflating your valuation or overhyping your traction.
Sustainable growth metrics are the key to attracting investors and achieving long-term success.
Understand the concerns of each investor type and address them in your conversations.