Continuing on our series of blog posts around raising seed/angel round for startups, we will focus on Valuations and the clauses in a term sheet.
1.Sector or Industry you are in: External Market Dynamics
- Study valuations of similar startups in your space who have raised their angel round.
- Study exits that happened in this space (acquihires, M&A)
- Study EBITDA (earnings before interest, tax, depreciation, and amortization)
- Understand growth metrics in your industry (it is important to baseline your growth metrics against competitive landscape)
2. Your Startup Profile and Your Business Metrics: Your Internal Metric
- Founding Team Profile (does the team have experience in the domain they are building the product, are their skills complementary, are they full time in the venture)
- Stage of the startup (refer to my earlier blog but the earlier you raise money, the higher you dilute)
- Will you survive the next 5 years? (Will you be able to build a company with the fund raised and continue to scale)
- Cost to grow the business (Customer Acquisition cost, Technology costs)
- Scalability of the business (global versus local play)
- Advisory Board / Mentors Involved
3. Some subtle aspects to valuation
- How desperate is the Entrepreneur?
- How many angel investors are taking to you and showing interest?
- Who is the angel investor who is willing to lead your round?
- Think a valuation that gives your Investors 10x return!
- Valuation is heavily skewed to equity planning. Assuming your startup will scale up and require to raise capital in subsequent rounds, it is important that at the end of a series C, the founders still have sufficient equity to stay motivated and build the Startup. As a thumb rule, don’t dilute too much to early as equity correction is extremely hard in subsequent rounds.
4. Understand what you are signing for in the Term Sheet
- Liquidation Preference (could tilt outcomes on exit – look for participating or Non participating references)
- Anti Dilution Clause
- Option Pool (on pre-money or post money?)
- Board composition
Trends on Valuation: