The Goldilocks Principle of Seed Stage Valuations

Seed stage startup valuations are a hard thing to get right. I’ve previously written three articles that cover strategies for figuring out 1) how much runway you need, 2) how to plan your current financing round in the context of your next financing round, and 3) how to estimate a reasonable valuation for your level of progress. In this post, I’d like to cover some of the risks of raising at either too high or too low of a valuation.

The Valuation is Too Low

The downsides of an unreasonably low valuation:

The Valuation is Too High

The downsides of an unreasonably high valuation:

The Valuation is Just Right

As Khosla’s Keith Rabois recently said on Twitter, the valuation should feel moderately uncomfortable for both the investor and the founder. Both sides should feel like it was a fair deal, not an amazing deal.

If one party loves the valuation, that typically means that the other party is getting screwed in the short term and both parties are likely to lose in the long term, for the reasons outlined above.

On the other hand, a valuation that seems fair to both sides is neither a bargain nor a rip-off, does not result in negative signaling about the company or its investors, and strongly aligns all parties toward the common goal of increasing the company’s value. When it comes to raising your seed round, don’t be greedy, but don’t be a sucker, either.

If you have other thoughts on the downsides of very high or very low seed valuations, please let me know on Twitter!

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