An active seed stage VC sent me a deck with this information about early stage valuations which I found very interesting.
Early Stage Valuations 2006 – 2013
2006: $2-3m pre
2007: $3-4.5m pre
2008: $2-2.5m pre
2009: first $5m caped note appears from YC
2010: $6-$8m capped notes
2011: $8-$12m capped notes
2012: $6-$8m capped notes
2013: $5m-$6m average, upwards to $8m capped notes
This shows the rise of the convertible note, the dip of 2008 and quick recovery for hot startups. Keep in mind the above numbers only apply to the “hot” startups.
Although these numbers are one investor’s perception of the market, it is hard to lump all seed rounds together where some are emerging from YC with energetic plans, but no traction or revenue and others are startups that have been building their business and growing revenue and still raising funding from angels and seed funds on convertible notes. So these all get lumped together.
If one considers that most companies will be sold for under $30m and most sophisticated angels need to see the real chance of making a 10x return on each investment to make up for the other failed investments that go along with this level of risk I think $3m is a good valuation for the very high risk hot early stage investment. Unfortunately, this often makes raw startups a young man’s game as the dilution at that valuation level does not raise enough money to support an older set of founders with higher family burn rates. Those older founders are expected to have already built up some personal capital and be able to invest cash into their own ventures. Despite the above view of valuations, I see plenty of valuations now ranging from $3m to $10m correlating to levels of revenue. When valuations get above $10m that is typically the point that most angel investors will back away and those startups should be hunting exclusively with VCs investing other people’s money. An angel would need to feel pretty good about an exit at $100m+ to invest at a $10m pre or cap.
Another dynamic I see here is that the amount of series A VC funding is contracting. So there is less of that class of money to go around. At the same time the volume of startups being created is increasing. The recent funding and launch of accelerators everywhere is increasing the number of startups that get initial support and results in more startups coming out of these 3 month programs seeking angel funding. I am sure that many of these accelerators will fail to achieve exits prior to their own funding running out and this may reduce the total number of startups hitting the funding market in a few years, but for now we have an imbalance of too many startups seeking angel funding that will then hit a wall of no series A VC funding. So what will happen is that these startups that succeeded in raising initial angel funding will come back for more angle funding as the VCs will not be able to feed them all. Some will continue to raise multiple angel rounds, some will unplug and others will adjust their business to live from customer revenue. Angels will organize more formally around crowdfunding models or accredited angel investor groups.