Fundraising in 2023 (2/4)

The above graph shows the evolution of valuations across the lifecycle stage of your venture. The younger your venture is, the more you are leaning on your story and ability to convince others of your vision. The further developed your company is and the closer you get to being listed, the more your valuation will be based on comparable companies, and in the case of an IPO ultimately ending in supply/demand-based pricing.

Following we will go through examples of finding your valuation and the effect the current market has on a company in your stage.

EDIT: As was correctly commented on LinkedIn, the amount of funding required calculated for the growth plan should always be latched to goals that, once met, empower the follow-on round. This is called the equity story and will be covered in Part 4/4. In short, depending on your stage these can be different goals such as proving product-market fit (reduced sales cycles / higher price elasticity), product scaleability (reduced onboarding time) or building a growth engine (efficient CACs / AE Sales Quotas < 5).

For early-stage ventures (Pre-Seed to Series A) this is a fairly simple equation

1. Consider how much cash you will need for an ambitious but realistic growth plan for the next 24 months, e.g. €2m
2. Consider if your past performance (company-wise or experience-wise) warrants such a sum, and adjust upwards / downwards
3. Validate these numbers with what’s currently happening in the market, e.g. are companies with similar growth, tech & team able to close similar rounds
4. The dilution will derive from supply/demand (but shouldn’t drastically move outside a 10–25% parameter), e.g. the more investors are interested in funding the smaller the dilution will be / the higher the amount invested vs your original ask
5. Consider your offer wisely, the best deal on paper is not necessarily the best deal for you or your company — ask yourself, do I want to be working with the person on the other side of the table for the next 10 years

In the chart below you can see that early-stage companies' valuations have barely dropped since their record highs in early 2022. As stated above, the reason for this is that the valuations are still calculated top-down, based on cash need rather than multiples as you can see in the chart below.

For the growth stage (Series B+), it is a bit more complicated

1. The further you are, the more traction/numbers you (should) have and the more your valuation will be based on these numbers.
2. Depending on the state of the market the view shifts, e.g. from simple MoM ARR growth towards the Rule of 40 and similar holistic metrics
3. Market-comparable multiples gain increasing relevance, you can screen the multiples of similar companies that currently trade publicly.
4. For Software, revenues on ARR usually are most relevant, but less technologized industries will deviate to EBITDA multiples. If you are not yet EBITA positive you can get creative, e.g. compare the gross revenue multiple.
5. The closer you are to IPO, the closer your numbers should tie up to the reality of public markets where there are a lot of examples.

In the chart below you can see the strong variance in EV (Enterprise Value) / Revenue multiples in the 2020–2022 years.

Of course, you will frequently see deviations from market norms but you never know what the underlying terms of the deal are, for example, a high valuation might look good on paper, but a high liquidation preference (in case of an exit, the last investor receives a multiple on their last investment before any of the proceedings are distributed) from the latest investor might already forfeit a large chunk of the exit value.

Always consider this, the earlier the investment, the higher the return needs to be (see also power law). This means for a pre-seed investment an investor would look for a potential 50x return and a later-stage investor would look for a 10x return — to offset the underperforming assets and achieve an overall return of +/- 3x.

Have you read part I yet? Click here to catch up on the first article.

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