Thread
Valuation of startups is such a mystifying concept and certainly something I didn't understand as a founder. What makes one startup "more valuable" than another?
Today's tweet thread is about the relationship between valuation and milestones.
Read on >>
Today's tweet thread is about the relationship between valuation and milestones.
Read on >>
1) I've written about startup valuations before:
2) The tl;dr of that thread is that valuation is not about how much you're worth.
It's a matter of supply and demand -- supply of your fundraising round and demand from investors.
It's a matter of supply and demand -- supply of your fundraising round and demand from investors.
3) This is why in a down-market like now, you often see depressed valuations -- there are just fewer investors who are investing.
It has nothing to do w your worth or progress at your startup.
Nor can you comp it with a competitor or similar company when they were your stage.
It has nothing to do w your worth or progress at your startup.
Nor can you comp it with a competitor or similar company when they were your stage.
4) I'll go one step further to say that revenue may be helpful in influencing valuation but it isn't sufficient in having *influence*.
Revenue proves that on a small level there's demand for your product. And, it also proves that on a small level that you can execute and sell.
Revenue proves that on a small level there's demand for your product. And, it also proves that on a small level that you can execute and sell.
5) So let's say you have $30k / mo in revenue. That's a huge accomplishment as a founder!
And you should be applauded for that!
And you should be applauded for that!
6) But unfortunately, investors don't care too much about it.
Even if you are making say $30k/mo in revenue, you're very far from making say $10m/mo (or more) in revenue, which is ultimately what VCs are looking for in a successful unicorn startup.
Even if you are making say $30k/mo in revenue, you're very far from making say $10m/mo (or more) in revenue, which is ultimately what VCs are looking for in a successful unicorn startup.
7) Extrapolating, that also means that investors don't really care then if you're making $25k/mo or $20k/mo in revenue or even $50k/mo or so in revenue.
It's all a blip compared to $10m/mo.
It's all a blip compared to $10m/mo.
8) So founders often think their valuation vs progress shows up linearly.
E.g. if you are doing $5k/mo in revenue, your valuation should be $x but if you're doing $20k/mo in revenue, your valuation should be 4x.
But that's not how it works.
E.g. if you are doing $5k/mo in revenue, your valuation should be $x but if you're doing $20k/mo in revenue, your valuation should be 4x.
But that's not how it works.
9) Investors think in terms of staircases. If you can prove out that you can build an early product and get some users, your valuation is roughly in range of $x.
But even if you double sales, unless you're derisking or unlocking something else, you're still in the range of $x.
But even if you double sales, unless you're derisking or unlocking something else, you're still in the range of $x.
10) So let's do a quick example.
Say you have an SMB SaaS product. And you make $500/mo from each customer. And you have say 10 of them -- so $5k/mo in revenue. Great!
Say you get 10 more customers for a total of $10k/mo, you're not going to get a big bump up in valuation.
Say you have an SMB SaaS product. And you make $500/mo from each customer. And you have say 10 of them -- so $5k/mo in revenue. Great!
Say you get 10 more customers for a total of $10k/mo, you're not going to get a big bump up in valuation.
11) Nothing new has been learned. Nothing really new has been de-risked or unlocked.
But now let's say that instead of 10 more SMB clients, you get only 1 enterprise customer who pays you $5k / mo.
That shows you can handle enterprise & that big clients also want your product.
But now let's say that instead of 10 more SMB clients, you get only 1 enterprise customer who pays you $5k / mo.
That shows you can handle enterprise & that big clients also want your product.
12) Now your startup is more interesting and derisked even though the revenue is the same in both cases.
So, you likely have more investors who are interested in investing, and therefore, a higher potential valuation.
So, you likely have more investors who are interested in investing, and therefore, a higher potential valuation.
13) So the relationship between progress and valuation looks more like a staircase....you're on one rung until you derisk or unlock something and then you go up a rung.
This is really what valuation and traction look like -- not linear -- but like a staircase.
This is really what valuation and traction look like -- not linear -- but like a staircase.
14) It is true that rounds tend to happen around revenue milestones.
And ppl get fixed on things like hitting revenue milestones like $1m ARR to raise a series A.
But, what is in those numbers is some unlocking of some new information *in addition* to more progress.
And ppl get fixed on things like hitting revenue milestones like $1m ARR to raise a series A.
But, what is in those numbers is some unlocking of some new information *in addition* to more progress.
15) So as you think about your fundraise planning, you should think about past feedback you've gotten and figure out how to de-risk some of those common pieces of feedback as part of your next raise.
Feedback like: will enterprise buy this? Will ppl buy again / be retained?
Feedback like: will enterprise buy this? Will ppl buy again / be retained?
16) All too often, I see founders just try to shoot for more revenue traction.
But, that alone won't get the raise done for much of a bump in valuation. Think in staircases not lines.
But, that alone won't get the raise done for much of a bump in valuation. Think in staircases not lines.
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Mike Maples, Jr @m2jr
ยท
Jan 11, 2023
Good thread.