How to Value Your Startup During a Seed Round: A Founder’s Guide
This is especially written for first time founders! So if you are one, this might be helpful for you. P.S. Not giving fancy methods from the text books, giving you a realistic picture on how it works!
One of the most frequently asked questions by first-time founders is:
“I am raising my seed round. How much should I ask for in valuation?”
I faced the same challenge when I was raising my seed round. Back then, I valued my business at $4M pre-money, but when investors asked me how I arrived at that number, I gave some pretty ridiculous answers:
I did a discounted cash flow of future "potential earnings" and based my valuation on that.
I used another business as a reference without considering key differences.
I justified it by saying, "We’re growing fast, so I feel it’s a fair ask."
Looking back, these answers crack me up! But you live and learn.
So, if you’re raising capital, let me explain how startup valuation actually works and how you can confidently justify your numbers.
Pre-Money vs. Post-Money Valuation
Before we get into valuation strategies, you must understand the difference between pre-money and post-money valuation. If you don’t, investors might assume you lack a basic grasp of fundraising (I learned this the hard way!).
Pre-Money Valuation
Pre-money valuation refers to the value of the business before new investment comes in.
Example: If an investor is putting in $1M and you are valuing your company at $6M post-money, then your pre-money valuation is $5M.
Post-Money Valuation = Pre-Money Valuation + Investment Amount
$5M + $1M = $6M post-money valuation
If a VC is offering $1M at a $4M pre-money valuation, then their ownership percentage will be:
VC’s Ownership = (Investment / Post-Money Valuation) × 100
(1M / 5M) × 100 = 20%
Post-Money Valuation
Post-money valuation is the value of the business after investment is added.
Example: If your business was worth $3M pre-money and a VC invests $1M, your post-money valuation is $4M.
If a VC offers $1M at a $4M post-money valuation, their ownership will be:
Pre-Money Valuation = Post-Money Valuation - Investment
$4M - $1M = $3M pre-money valuation
VC’s Ownership = (Investment / Post-Money Valuation) × 100
(1M / 4M) × 100 = 25%
A small difference between pre-money and post-money can significantly impact your ownership. Be extremely mindful of the terms during negotiations.
How Are Seed Rounds Valued?
You might think valuations follow complex mathematical models, but in reality, early-stage valuations are highly speculative. There is no set formula; instead, valuations depend on multiple factors, including market trends, investor interest, and competitive benchmarks.
Here are three primary methods used to justify startup valuations:
1. Benchmarking with Competitors
Look at valuations of similar startups in your industry.
Most early-stage startups give out 15%-25% equity in their first round.
If a startup raised $1M then it can be implied that they mostly raised for around $4M to $6M valuation which is 4x or 6x.
A common valuation multiple which I have seen for seed-stage startups is 3x-5x of how much you want to raise within realistic probabilities. You can’t go and say I need $50M at $250M valuation without any product!
2. Revenue Multiples
If you have traction, your valuation power increases.
Example: If you have 1,000 paying users at $500 per year, your revenue is $500K. You can ask for a multiple of your revenue.
If bootstrapped and achieved the numbers at a faster pace, then you can negotiate a higher multiple.
If pre-revenue, project conversion rates and revenue expectations to justify valuation.
3. Internal Benchmarking by VCs
VCs have internal benchmarks based on industry trends.
If a sector is hot (e.g., AI, Web3, Fintech), investors may offer higher valuations.
Example: Fintech startups might get $5M post-money, but an AI startup could push for $10M+.
Other Factors That Improve Valuation
Think of valuation like a credit score—the stronger your profile, the better your terms:
Top Universities: Founders from elite institutions (Harvard, Stanford, IIT, IIM) often command better valuations.
Experience in Early-Stage Startups: If you’ve been part of a fast-growing startup, investors know you have the expertise.
Product & Traction: Even without a pedigree, strong traction and revenue make you an attractive bet.
How you should go about it??
Valuing a startup is often seen as a complex process, but it doesn’t have to be. If you're trying to determine a fair valuation for your business, here’s a simple reference formula that keeps things reasonable while factoring in key variables like revenue, market opportunity, and founder pedigree.
The Basic Formula for Startup Valuation
If you have revenue (X), apply a multiplier of 3x to 5x based on the size of the market and the opportunity:
3x if the market isn't highly exciting.
5x if the market is highly attractive and scalable.
If you don’t have revenue yet, but you have an expected revenue once monetization is turned on, use a 2x to 3x multiplier instead.
Additional Multipliers to Consider
Rapid Growth & Traction: If you’ve achieved revenue and metrics exceptionally fast, add another 2x.
Strong Founding Team & Experience: If you have prior startup experience or come from a strong professional background, add another 1x or 2x.
Example Calculation
Let’s say you want to raise $1M and currently have $200K in recurring revenue:
Base valuation: $200K * 5 = $1M (assuming an exciting market)
Rapid growth factor: $1M * 2 = $2M
Strong founder background: $1M * 2 = $2M
Final post-money valuation: $5M USD – a fair and reasonable ask.
What If You Don’t Have a Product Yet?
For pre-revenue startups, valuation depends on:
Industry Benchmarks (X)
Market Size & Revenue Potential (1x to 3x multiplier)
Founder Pedigree & Background (apply discounts or additional multipliers based on experience)
Negotiation Skills
Example (This is a real one btw!):
Let’s consider an AI startup with a 2-year timeline for revenue. A similar company raised $1M at a $4M post-money valuation.
The founders:
One had previously scaled an early-stage business for 8 years.
The co-founder was an AI expert who built a successful AI platform.
Here’s how they structured their valuation:
Industry Benchmark Valuation: $4M
Phenomenal Founders & Experience (2x): $4M * 2 = $8M
Strong Market Potential (3x): $8M * 3 = $12M
Final Valuation: $4M + $8M + $12M = $20M USD
They successfully raised $5M at a $20M valuation—without a product.
Key Takeaways
This formula is only for early-stage fundraising; future rounds depend on actual revenue, metrics, and market traction.
A startup’s valuation represents the potential value it can generate for shareholders.
A strong negotiator can push for better terms, regardless of these frameworks.
By using this as a reference, you’ll have a solid foundation for structuring your valuation and making a compelling case to investors.
Key Lessons from My Fundraising Journey
1. Don’t Over-Bargain for a Higher Valuation
Take a reasonable deal and focus on growth.
I lost out on great investors early on because I was too focused on valuation.
2. Investor Quality > Valuation
A strong investor at $10M valuation is better than a random investor at $15M.
Strategic investors add long-term value and open doors.
3. Choose Investors Who Can Help You
In the early days, find investors who can help with GTM, hiring, and intros.
Example: If your investor’s portfolio companies could become your customers, that’s a massive advantage.
4. Be Mindful of Whom You Raise From
Not all money is good money.
Research investors, talk to their portfolio founders, and check their reputation.
YC has an investor review database—DM me if you need insights.
Final Thoughts: A Realistic Take on Seed Fundraising
If you're a first-time founder raising your seed round, I hope this guide gives you a realistic picture of how valuations work. In the end all I can say is “Don’t chase valuations, chase revenues! The valuations will follow!”
🚀 If you’re a founder looking to raise seed round or an aspiring founder looking for guidance, feel free to reach out! I’d love to help.
LinkedIn | Twitter | Book a meeting slot here
Keep building, Keep inspiring! Because you are the best!
And if you like my experiences and content and if you think that it will be helpful for other, feel free to spread the word by sharing it :)
"if a sector is hot" 🤣🤣
Insightful btw! Great work..