One of the most common questions our investment team gets is this: how do I set my startup's valuation?

First – it's okay if you're not sure what your startup’s valuation should be. You don’t set valuations every day (or ever). No one expects you to be an expert in this.

There are resources out there that can help. For example:

• MVCA Pitchbook Report → keep in mind that this includes pre-money valuations, which are a little confusing
• Carta’s valuation report → this gives a post-money valuation (used by the YC SAFE), and data around geography, sector, and stage

Peruse those reports as you please. But at the end of the day, investor appetite often plays a big role in your valuation. So what are investors looking at when it comes to valuation?

Today we’ll dive into the factors that Hustle Fund evaluates. Remember, we are a pre-seed venture capital firm. We look at five key factors:

1. The product
2. The market
3. Traction and execution
4. The team
5. Ability to fundraise

Let's break these down, shall we?

On the product side...

At Hustle Fund, we tend to assign a higher valuation to companies that have built an early version of the product.

This can be low code, no code, or just duct-taped together. But building something before you raise is a smart move.

Building shows that you have gone beyond the idea phase. Don't worry. We know this is an ugly first draft.

But it's not just about having a product. We’re also looking at:

1. Active users: Are people actually using your product? Even if you only have 1 user, we want to know.
2. Retention: Are users sticking around?
3. Differentiation: Does your product stand out in the market either because of features or audience you're serving (or both)?
4. Defensibility: Is it hard for others to copy what you've built?

On the market side...

Now, let's talk about the market.

Remember, pre-seed VCs are looking for a 100x return on their investment. Here’s why.

If you're going after a $10m market, VCs won't touch you. Why? Because even if you get the entire market, you're only going to make $10 million a year. There's just no way a VC would see a 100x return on a market that small.

When VCs evaluate your market, they're considering:

• How big the market is today
• How fast the market is growing
• Your ability to expand the market (no pressure)
• Who are the other players? Will you be going up against a lot of companies, or one major incumbent?
• Will you be able to get customers? Do you have a unique entry point here?

Your market today may be quite small. But if you can prove that the market will expand, the size of the market right now may not be a problem.

Maybe you know that the market is about to explode because of some technological innovation, regulatory change, or cultural shift that's happening.

In fact, HF investor Haley Bryant recently saw a company – with no product built – raise at a $14m valuation. How is this possible? Because they were targeting a huge, fast-growing market with no great solutions yet.

But a great market isn't everything. VCs also want to see how you're executing within that market. Which brings us to...

Traction and execution

VCs don't expect to see a ton of traction (revenue or customers) from early-stage startups. But they do want to see that you're experimenting and making progress.

Here's what they're looking at:

• Unique insights from customer discovery
• Customer retention (this is huge)
• User base growth rate
• Problem-solving and experimentation

Look, I know it's hard to acquire customers. That's why the total number of customers you have isn't important at the early stage. Seriously – anything above 0 is a win.

But if you're not retaining your customers, that is a bright red flag. That means you either aren't solving a big enough problem, or you don't know who your ideal customer truly is.

And one of the things we've seen across 560+ companies at Hustle Fund is that low retention in the early days leads to low retention as you grow. This is why your customer discovery is so critical.

The team side...

In the early days of a startup, a huge chunk of the company's value is... you. The team.

VCs are looking for:

1. Strong founder-market fit
2. Experiences you’ve had that make you an expert in this space
3. Dedication to learning and executing, then learning and executing some more

It's not about where you went to school or where you've worked. It's about your insights into this industry, your ability to execute, and your persistence in making that 1% daily progress.

And finally, your fundraisability.

You’ll likely need to raise from more than one investor in order to fill out your round. And you’ll likely need to raise again. So your ability to fundraise is actually a big factor when it comes to valuation.

Can you:

1. Tell a great story? Articulate your market opportunity in a compelling way?
2. Run a tight fundraising process? Are you stacking meetings back-to-back or taking one meeting every 2 weeks?
3. Create investor demand: Can you generate FOMO to drive interest?

If you’re not sure how to run a tight fundraising process, you'll like this series.

Summing it up

That’s it. The five key factors that Hustle Fund considers when it comes to valuations.

Valuation is a conversation, not a unilateral decision. Be open to investor perspectives. Don't be afraid to ask investors what matters most to them when it comes to assigning a valuation.

Remember: this is just the beginning of your startup journey. Your true value? That's something you'll be building for years to come.

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