Valuing these early stage companies is challenging given their highly uncertain nature and can definitely be viewed as an art rather than a science. Unsubstantiated revenue and profit prospects and the tendency for parties on either side of the transaction to have good reason to argue the number up or down according to their viewpoint ensures that this will inevitably be the case.
Consider a firm that has a unique business concept, significant growth opportunities, and no real positive cash flow to show the profit potential of the venture. Valuing such high growth, high-uncertainty firms is a major challenge faced by angel and venture capital investors around the world.
Valuing a company too low means possible over-dilution of the founder’s ownership stake, or even, if investors and the founder don’t agree on pricing, lead to the company not being financed at all. Raising money at too high a valuation may mean that investors do not have an ownership interest that properly reflects the investment risks that they are taking. It also increases the risks of subsequent “down rounds”, and will definitely have a negative impact on the investment returns that investors ultimately achieve. Again, it may also lead to the company not being financed at all if the entrepreneur is not willing to accept a lower valuation than they would like.
The dataset shows that the median, seed, start-up, and early expansion pre-money valuations were $1.08m, $2.4m and $7.45m respectively. There is, however, substantial variance across industry sectors. The Software and Services industry sector has the lowest median pre-money valuation at seed stage, at $500,000; rising to $1.85 million median pre-money valuation at start-up stage. The Biotech, Capital Goods, and Energy sectors have median pre-money valuations of $2.5m Seed, $3.9m Start-up and $10.7m early expansion. Stripping out the distorting effect of these sectors from the data has a substantial effect on the median pre-money valuations on the balance of the dataset.
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