What is Startup Valuation?
Startup valuation is the estimated economic value of a startup company, used to determine how much equity investors receive for their capital. Unlike public companies valued by market trading, startup valuations rely on methodologies like revenue multiples, comparable transactions, and discounted cash flow. Valuation is as much art as science, influenced by market conditions, investor competition, and negotiation leverage.
The Formula
Revenue Multiple: Valuation = Annual Revenue × Industry Multiple VC Method: Post-Money Valuation = Investment Amount ÷ Equity Percentage Pre-Money Valuation = Post-Money Valuation − Investment Amount
Revenue multiples vary from 5-15x for typical SaaS to 20-50x for high-growth companies. Growth rate, retention, and margins heavily influence the multiple.
Worked Example
A SaaS startup with $2M ARR, growing 120% YoY, with 95% gross margins and 130% net revenue retention.
- Base SaaS multiple: 10x revenue
- Growth premium (120% YoY): +5x = 15x
- Margin premium (95% gross): +2x = 17x
- Revenue multiple valuation = $2M × 17x = $34M
📌 This company would likely raise at a $30-40M pre-money valuation. Exceptional growth, margins, and retention justify a premium multiple.
Why This Matters
Fundraising terms
Valuation directly determines founder dilution. Raising $5M at $20M pre-money gives away 20%. At $40M pre-money, the same $5M only costs 11.1%, nearly half the dilution.
Employee equity value
Valuation determines the value of employee stock options. At a $50M valuation, a 0.5% option grant is worth $250K. At $100M, the same percentage is worth $500K.
Strategic decisions
Valuation benchmarks help founders decide when to raise, how much to raise, and whether acquisition offers are fair or lowball.
Common Mistakes
❌ Over-indexing on valuation
A higher valuation means higher expectations. Raising at $50M when you're a $30M company creates a valuation overhang, you must grow into it or face a down round.
❌ Using the wrong comparables
A B2B SaaS company should not use B2C marketplace multiples. Industry, business model, and stage all affect appropriate multiples. Use closely matched comparables.
❌ Ignoring liquidation preferences
A $100M valuation with 2x liquidation preference means investors get $200M back before founders see anything. Terms matter more than headline valuation.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| Pre-Seed | $3-8M | $1-3M | Below $1M |
| Seed (with traction) | $10-25M | $5-10M | Below $3M |
| Series A ($1M+ ARR) | $30-80M | $15-30M | Below $10M |
Source: PitchBook Venture Capital Data
Benchmark data sourced from PitchBook Venture Capital Data.