You have a great idea. You’ve interviewed customers and are building your MVP.  And now you want to raise money to grow your company.

But what is the company worth? How do you determine its value … especially when you have little (or no) revenue?
It’s one of the most common questions seed-stage founders have, and rightly so. If you set the valuation too high, you’ll struggle to raise capital and set unrealistic growth expectations (with VCs).

If you value the company too low, you’ll dilute equity, lose ownership of the business, and struggle to attract top talent.

So, how do you get the valuation just right? There are two important factors.

The supply-demand dynamics

Many founders think seed valuation is about how much their company is worth. But that’s not the case.

Let’s say you’re raising $200K and have investor interest of $500K+. You’re now in total control and so can bid your valuation up.

But if you’re raising $2M and no one’s interested? Then your valuation is $0.

So, valuation is less about your “actual” worth and more about the supply-demand tussle: supply of your fundraising round and demand from investors.

One could argue, “What investors pay depends on what they think you're worth.” That can be true, but isn’t the only factor at play.

It can be true because the more proof points you’ve got (market validation, traction, revenue, etc), the more investors will be interested, and the more you can increase the valuation.

But there’s something else to consider: funds operate differently depending on their size, stage, and process. Here’s an example:

Let’s say two funds are interested in your company. One is a $1B fund, the other is a $100M fund.

The first investor ($1B fund) has more capital available, so they will likely be open to a higher valuation. If they love the company, they won't bargain much because they see the first round as an entry to participate in future rounds.

But the second investor ($100M fund), has less available capital, so they’ll try to scoop as much equity as possible.  

Why? They won't be able to compete with larger fund sizes in future rounds… in large part because they won't have as much money left over for follow-on checks.

The relationship between valuation and milestones

Here’s another myth you should be wary of: valuation scales in line with revenue.

For example, if you’re doing $5K in revenue, you might think your valuation will be $X, and if you’re doing $20K in revenue, your valuation should be 4X.  

But that’s not how it works.

Investors think of valuation in terms of staircases. If you can prove you can build an early product and get some users, they’ll value you at $X.

But even if you double sales, unless you're derisking or unlocking something else, you'll still be in the range of $X.

Let me explain.  

Say you sell a SaaS product for $500/mo to SMBs. You have 10 customers and make $5K/mo in revenue. You then hustle to acquire 10 more customers, generating $10K/mo in revenue. But your valuation still won’t increase because you haven’t shown that you can enter new markets or overcome challenges.

But now let's say that instead of 10 more SMB clients at $500/month, you get 1 enterprise customer that pays you $5K/mo. That shows you can close enterprises and that big clients also want your product.

This is interesting to investors (and will raise the valuation) because although the revenue is the same in both cases, you’ve now unlocked new growth opportunities and de-risked your company.

Let’s wrap it up

As you think through valuation, it’s less about how much you’re “worth” and more about:

1. How do you create a good supply-vs-demand dynamic in your round? A repeat founder or someone growing extremely fast will obviously have more investor demand.
2. How can you de-risk your company and find new growth opportunities? Talk to users, diversify your customer base, enter new markets, etc.
3. Which investors do you want to work with? Consider factors beyond money.

For example, one of our portfolio companies had two term sheets with different valuations.

The founder decided to go with the fund that offered a lower valuation because of the strategic help that fund could provide.

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This article was written by Sameer Ansari. Sameer has 4+ years of experience writing for technology startups, VC funds, and founders. You can find him on Twitter here.