Thoughts on startups by investors that
fund them & entrepreneurs that run them

A Bubble for Seed Stage Valuation

When entrepreneurs raise equity capital for startup companies, the investors’ percentage of ownership is determined by the negotiated valuation for the company at the time of investment.  For example, if the negotiated pre-money valuation is $1.5 million and the investors provide $500,000 in equity investment, the investors are purchasing 25% of the company [$0.5 million ÷ ($1.5 million + $0.5 million)].  And, as you might expect, when the company grows and meets important milestones (granted patent, first revenues, etc.), the valuation of the company increases.  If investors fund the company at a later stage, after the company has met important milestones, the investors’ $0.5 million in capital will purchase less of the company.  Not surprisingly, entrepreneurs are generally encouraged to postpone fundraising until critical milestones have been met, so entrepreneurs can sell less of their company to raise a given amount of capital.

But, as Mark Suster points out, the valuation of startup ventures also varies with demand.  When asked if we are now in another demand bubble, Mark responds “Duh…of course….!”  So, not only does valuation increase as companies mature, the valuation of new enterprises vary with a demand cycle.  Demand was extremely high during the Internet bubble (ending in 2001) and very low in 2007-09.  And, in 2012, prices have risen dramatically again.  Will this bubble end soon?  Suster suggests we will see the valuation bubble burst within the next 24 months.

So, valuation varies with demand and with the maturity of the company.

But entrepreneurs must also realize that there is very little valuation consistency across the geographic and business vertical spectrum of this country.  Some geographic markets are hot (high demand for startup deals in NYC) while others are not.  Some business sectors are hot (Internet) while others are cooling (medical devices).   Entrepreneurs must research startup valuations in both the local market and their business vertical before negotiating for funding.  Also look at several valuation methodologies prior to seeking capital.

What is the message regarding startup valuation?  Entrepreneurs:  Know your marketplace.  Do not expect the same valuation for a gaming startup in Atlanta as for a biotech startup in Boston.

Here are some important points for entrepreneurs to remember when raising seed/startup capital:

  • Raise money far in advance of need.  It always takes longer to raise money than one expects.
  • Don’t try to predict the fundraising cycle.  You will probably be wrong anyway.
  • Hit as many milestones as possible before raising money, to maintain as much ownership in your company as possible.
  • On the other hand, if investors come knocking at a reasonable valuation and you will eventually need to raise funds – take the money!  A bird in the hand…you know the rest.
  • And, if you are oversubscribed (investors offering more money than you had intended to raise) – take the money!  You never know when a hiccup will result in your new enterprise needing more money than expected.


All opinions expressed are those of the author,  and do not necessarily represent those of Gust.

Written by Bill Payne

user Bill Payne Angel Investor ,
Frontier Angel Fund

Bill Payne has been actively involved in angel investing since 1980. He has funded over 50 companies and mentored over 100. He is a founding member of four angel organizations: Aztec Venture Network, Tech Coast Angels, Vegas Valley Angels, and Frontier Angel Fund.

prev next

You might also be interested in

The UrbanTech Movement is Transforming Cities

Urbanization is a defining process of modern life.

More than half of the world’s population now lives in cities, and the number of urban citizens around the world is projected to rise to 66% by 2050.

In the US, over 80% of the population lives in urban areas with 1 in 7 Americans living in New York, Los Angeles and

Read more >

Angel Investors Spotlight: An Inside Look at Hudson Valley Startup Fund’s Investment Process & Advice for Founders

Hudson Valley Startup Fund brings together a network of the region’s successful business and community leaders to give back, supporting the launch of the next Hudson Valley visionaries. We sat down with fund managers Chad Gomes, Johnny LeHane and Paul Hakim as they shared insights into their investment process, what they look for in both group members and startups, and

Read more >

The Right Startup Advisors Are As Valuable As Money

If you are a new entrepreneur, or entering a new business area, it’s always worth your time to assemble an Advisory Board of two or three executives who have travelled that road before. You need them before you need funding, and if you select the wrong people, or use them incorrectly, no amount of money will likely save your startup.

Read more >

How do I get in touch with investors/funds with just an idea and no product?

There are many wonderful ideas, and they are not necessarily easy to come up with. So congratulations on having thought of one!


“Having value” and “Being fundable” are two completely different things. What the more experienced responders here are saying is completely accurate: while a good idea is usually a necessary ingredient for the formation of a good company, it is

Read more >

Is there an incubator for aspiring Angel Investors or VCs?

No, but there are several sets of courses on angel investing that can provide a good base from which to start. The most comprehensive and best known is the Power of Angel Investing seminar series developed by the Angel Resource Institute (formerly known as the Angel Capital Education Foundation, and prior to that part of the Angel Capital Association). It

Read more >


2 thoughts on “A Bubble for Seed Stage Valuation”

  1. Geoff says:

    Note: A 1.5M valuation with a 500K investment yields 1/3 or 33% not 25%.

    Greenish investors typically seek a majority without realizing they’re taking motivation from the founder. Best bet is to locate people in your space and take 100% of your development costs but little beyond it. Venture capital is something unnecessary as its an instrument for companies to have enormous valuations. 

  2. ben says:

    No … 0.5Mm is 25% of (1.5 + 0.5M)  ….   1.5M is the valuation prior investment .. 2M after investment .. An investmnent of 0.5 gives 25% of the share