Considering your valuation and ask

- [Instructor] I collected baseball cards as a kid. I had this book that told me how much each of these rare cards was worth, but my dad would always tell me, something is only worth what someone else is willing to pay for it. The same is true when you're seeking investment for your company. For you and an investor to agree upon an investment, you also need to agree on the value of your company, so you each know how much of it the investor is buying. Your valuation is the current estimated worth of your company. The more mature a company gets, the easier it is to perform some statistical and financial analysis to determine what the market believes the company is worth, especially for public companies. But with private companies, especially early stage companies, that analysis is a lot more art than science. You'll hear the terms pre-money valuation and post money valuation used in different circumstances. Pre-money valuation is the value of your company before any investment is made. Post-money evaluation is the value of your company, including the investment. If your company had a pre-money valuation of $4 million and you received a $1 million investment, your post-money valuation would be $5 million. This is important because it affects the price someone is paying to invest in your company. Back to our example, so if your company is valued at $4 million pre-money and receives a $1 million investment, then your post-money valuation would be $5 million. You would own 80% of the company and the investor would own 20% of your company because her $1 million is 20% of $5 million. If the investor believes your company is worth $4 million post-money, or after a $1 million investment, then your pre-money valuation would be $3 million. The investor would then be purchasing 25% of your company for the same price, because $1 million is 25% of $4 million. So how are valuations determined? As I said before, the younger the company, the more investors will rely on a few key data points to make some assumptions about your company. Those data points are, first, stage of your company. Investors see a lot of deals, so they will assume a seed investment will be within a certain range, same with series A, series B, and so on. Second, experience of the founder. The more experienced the founder, the higher of a valuation investors will agree to. Third, funding competition. This is simple supply and demand. The more investors there are competing to invest in your company, the higher you can push your valuation. Next is market size, the more customers you can serve, the larger your total addressable market and the higher your valuation can be. And finally, economic performance, when the overall market is down, valuations are down, when the overall market is up, valuations are up. There's nothing you can do to control this, you just need to be aware of it. I would start by looking at the stage of your company and the valuations other companies at your stage have received from the investors that you are pursuing. If you are a seed stage company, and your ideal investor doesn't invest in seed stage companies valued at more than $5 million, don't expect to get a higher valuation than $5 million from that investor. The more realistic you are about the stage of your company and the size of your market, the more seriously investors will take you. And the more seriously investors take you, the more likely you are to convince them that your valuation makes sense.