Investor Acquisition

Seed Stage Fundraising: How to Set a Valuation in 2024

Seed Stage Fundraising: How to Set a Valuation in 2024

When you're raising your seed round of venture capital, your valuation is one of the most important factors. 

But how do you know what the right valuation is? The traditional thinking on valuations has always been to "let the market decide". 

The goal being to create a feeding frenzy and let investors bid up the price of your startup.

But the fundraising market has changed quite a bit since 2021 so is this still the best strategy?

Well, in this article, we will be discussing fundraising valuations and sharing why letting the market decide is no longer the best approach to pricing your round. 

Let's dive in!

Should you let the market determine your valuation?

The strategy of letting the market decide has been the de facto approach to fundraising for quite some time. If you watch a YouTube video, read an article, or even ask a VC, most will recommend this strategy. 

They're right though, this is how startups get the highest valuation. 

So what’s the issue? It requires that you be a highly attractive startup to investors. As you might know, not all startups create a feeding frenzy when raising capital. This is especially true in today's market (2024), where investments and valuations have completely dropped off.

How should I calculate my startup's valuation?

If you're not an extremely attractive startup or a founder with multiple exits under your belt, there's going to be a better way than letting the market determine your valuation. 

A better strategy is anchoring the price to something investors believe makes sense. Investors are not idiots when it comes to valuations, and they know they can always make a counter offer if they don’t agree on the valuation.

So what's the best strategy to set a valuation when raising capital for a startup? The best way to calculate your startup's valuation when raising capital is to study the market, stay up to date on the most recent rounds of funding, and do your best to select a valuation similar to startups at your stage and in your industry.

This is by far and away the best way to determine your initial valuation when raising capital. Again, if the investor believes it's too high, they can always counter with a lower offer.

The biggest benefit of this strategy is that by providing a valuation, you are moving the conversation forward and giving the investor some insight into what you are expecting. This is opposite to letting the market decide, where the investor has literally no idea where the valuation might sit.

Y Combinator's Impact on Seed Stage Valuations

It's been leaked that Y Combinator is recommending that their startups raise at a $20M post-money valuation via the Y Combinator SAFE, which is their templated version of a convertible note

If you've been in the startup community for a while, you'll know that investors are extremely eager to invest in Y Combinator startups. You'll likely also be aware that many investors are upset about this $20 million post-money valuation. 

Most have expressed that they don't believe the startups are deserving of it, but then again, it seems like it hasn't blocked Y Combinator startups from raising capital. 

So, how does this help you? This has anchored many investors to the idea that seed stage companies raise at a $20M post-money valuation. So if you're asking for a valuation far below $20M, the investor will likely be okay with your valuation since they're so used to seeing early-stage startups raise at $20M post-money valuations. 

Keep in mind that Y Combinator companies are generally well vetted, have products in the market, have traction, and often have technical founders. So if you did not go through the Y Combinator accelerator, you'll likely have to pick a valuation far below $20 million to start.

If you applied and weren’t accepted, there are other accelerators worth considering. They are not as prestigious as YC but they can still be helpful. 

Wrapping Up

When it comes to calculating your startup's valuation when raising capital from investors, it's great to let the market decide if you have that option.

However, most startups don't have that luxury. A better approach is to select a price and let the investor determine whether or not it's the right price. This will keep your conversations moving forward and will give investors some insight into what the terms of the investment might look like. 

For now this is the best strategy but keep in mind things might change. The economy is ever changing and who knows, maybe 2024 will be another frothy year for startup fundraising.

If you'd like to learn more or if you need help finding investors, feel free to reach out to our team. We're always more than happy to help founders out where we can.

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