Quick Startup Valuation Formula

February 10, 2013

in Acquisition, Fundraising, Negotiation

I enjoy the weekly rest of Sundays. As part of my Sunday routine I like to catch up on reading, often from my queue in Instapaper.

I ran across an interesting article by Ben Horowitz and some class notes by Peter Thiel that presented the same startup valuation formula, basically a tongue-in-cheek position that the value of a startup goes up with engineers and down with MBAs:

  • pre-money valuation = ($1M*n_engineers) – ($500k*n_MBAs).

I think the reason the idea is catchy is that there is some truth in that formula. And given that all startup valuations are crapshoots anyway, it’s a fun one to throw into the mix.

Along these same lines, it’s interesting to watch how valuation negotiation works on Shark Tank. Valuation lessons learned from Shark Tank include:

  • The entrepreneur controls the biggest card:  the initial positioning of the anchor offer. Valuations never go up from the anchor offer.
  • If the entrepreneur is too high, the investors will knock the deal down to size. I don’t think I’ve ever seen an episode where a shark would flat out not invest because they were simply turned off by a high initial valuation.
  • Valuations that are too low are risky too, because the investors are wary of investing in a low self-confidence entrepreneur.
  • Having multiple interested and competing investors keeps valuations higher than anything else.

What formulas do you use to value your startup? What lessons have you learned from Shark Tank?

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