What You’ll Read

• Why raising capital is common for startup companies
• How investors differ across a company’s fundraising journey
• Market impact for startup valuation
• What valuation means for a company’s stakeholders  

Key Takeaways

• When startups raise capital from investors, both parties agree on a valuation that determines the transaction price of the investment.
• Investors value companies differently based on the company’s stage in their lifecycle.
• Private market investors can generally be characterized as early-stage, growth-stage, and late-stage investors.
• Economic and fundraising trends impact how investors approach valuation.
• Valuation determines the financial returns for stakeholders based on the entry price valuation (when shares are acquired) and the exit price valuation (when there is a liquidity event).  

As an entrepreneur, you may decide to raise capital from investors to fuel your company’s growth.

If you accept outside investment, you’ll have to agree upon a valuation for your company with investors. This determines a transaction price—at which investors are willing to purchase interests, and you, the entrepreneur, is willing to sell a part of your business.

Raising outside capital is particularly common for startup companies that operate in high-growth industries often driven by technology.

In this article, we’ll explain how companies are valued by investors at different stages of their growth journeys.

How investors differ across a company's lifespan

At every stage in a company’s journey, there are unique challenges and opportunities a company faces in order to get to the next level. To accommodate a company’s unique position, investors commonly specialize in investing in specific fundraising stages.

In general, private market investors specialize in early-stage, growth-stage, or late-stage investing.

The stage of a company will determine the criteria investors look for when conducting due diligence on the investment opportunity. As a startup matures, an investor’s diligence criteria will help inform their financial underwriting models and ultimately, their target valuation for the investment.

Below, we’ll describe how investors value companies at different points in their growth journey.

Early stage investors

Early-stage investors make investments in companies that are in the beginning stages of their lifespan. These companies often have little or no traction and are in the process of finding product-market fit.

Early-stage investors are often:

• Angel investors
• Early-stage venture capitalists
• High-net-worth individuals
• Family offices

What early-stage investors look for when valuing companies

Early-stage investors care deeply about a company’s initial team members, as well as the market and any early traction the company has.

Team: Since there is not a lot of data yet on the company’s performance, investors place a heavy emphasis on the early team.

• Has your team worked together before?
• Do you have domain expertise?
• Have you been a successful entrepreneur before? Have you raised investor capital or led a company through an exit?
• Why are you the best team to solve this problem right now?

Market: Investors also want to see that a company is going after a large market or has the ability to “create” a market, meaning, providing a solution to a problem that people don’t know they have yet.

• How many people suffer from the problem you are solving?
• What is the revenue potential of the current total addressable market and how much of that market is immediately serviceable?
• What is the growth rate of the market? How large will the market be in the future?
• What is the current competitive landscape in the market? Are there barriers to entry?
• Which existing companies could be addressing the problem? Are they? If not, why not?

Validation: Investors love validation at the earliest stages. Something that says “This could be a big business.”

At the pre-seed or seed fundraising rounds, validation could be based on survey results, waitlist sign-ups, registrations, or other forms that indicate customer interest.

At the Series A stage, validation looks more like the beginning signs of traction, including early customers and revenue, signed letters of intent, or other promising interest from customers. Once traction begins to develop, investors will want to analyze customer and revenue growth rates, as well as churn, customer satisfaction, and other proof points that demonstrate people need your product.

Growth stage investors

Growth-stage investors invest in companies that have already built their initial product, acquired their first set of users, and grew their initial team. Companies in this category often raise capital from investors to expand their product offerings, enter new markets, scale their teams, and attract new customers.

Growth-stage investors can be:

• Family offices
• Growth-stage venture capitalists
• Private equity investors

What growth-stage investors look for when valuing companies

Growth-stage investors value companies based on their growth rate, traction, competitive landscape, and governance health.

Growth rate: Customer growth and revenue growth are two key aspects investors care about in growth-stage startups. Depending on the industry, core metrics can include daily or monthly active users (DAUs or MAUs), annual or monthly recurring revenue (ARR / MRR), net retention revenue, and churn, among others.

• Has the company been growing month-over-month?
• Has the growth rate been increasing or decreasing?
• What impact does customer churn have on the growth rate of the company?
• Is growth concentrated within a certain vertical? Are there cross-selling opportunities or growth potential from expanded services?
• Is this growth sustainable and scalable across new markets?

Traction: Investors will look into a company’s customer base, partnerships, and enterprise clients if applicable. Traction is very important at the growth stage and is a strong indicator of product-market fit.

• How many customers does your company have?
• What are your key engagement metrics and how has engagement performed?
• How long does the average customer stay with the company? What percentage of customers churn within a relevant time frame?
• What percentage of customers upgrade to a higher-tiered plan or opt-in to new service offerings?

Competition: Investors will want to assess the competitive landscape of a growth-stage startup. Some industries might be a winner-take-all industry, while some markets might have room for multiple successful companies. The ability to grow and increase market share is an important feature of a venture-backed company. Competition due diligence is done for this reason.

Notably, venture-backed startups have big ambitions, including global customers. Investors will analyze your competition in your direct market, as well as markets around the world.

Is there a risk of an incumbent entering your market? Does your growth strategy include competing in markets with existing competition?

Governance: The way that companies make important decisions becomes a critical component of due diligence for growth-stage investors. This includes how voting rights are distributed among key shareholders, including the executive team, and reserved matters. Sometimes, investors will realize that a company has a broken cap table and key decision makers like the CEO have little voting power compared to early investors. Corporate governance can benefit or hurt a company as it continues to mature and seek and exit opportunity.

Late stage investors

Late-stage investors vary by type and can include a broader group of investment firms given a company’s proximity to entering the public markets.

Late-stage investors can include:

• Late-stage venture capitalists
• Strategic investors
• Public market investors

What late-stage investors look for when valuing companies

Late-stage investors value companies primarily on their financial health, earnings and product diversification, and future exit opportunities.

Financial Health: Investors value a late-stage private company on their financial health. Investors will take a careful look at revenues and expenses, growth expectations, and potential valuation multiples.

• Do the company’s unit economics result in healthy operating margins?
• Is there a path towards profitability if not already profitable?
• Is the company still growing at a healthy rate?
• Is there a meaningful percentage of recurring revenue and upsell opportunities? Is the business model dependent on constantly acquiring new sales or customers?
• What are the key risks to the company’s financial health?
• How large is the potential upside given the current valuation metrics, and projected growth targets?

Diversification: As a company matures, investors increasingly want to see a company broadening its products and services. This can mean serving new customer segments, launching new products or services, or expanding into new markets. Investors value this for two primary reasons:

1. To diversify the company’s revenue sources from a risk standpoint, and
2. To grow the company’s revenue and market share of newer products

Exit opportunities: After several rounds of venture capital funding, late-stage investors want to know if the company has a path toward liquidity via an exit event. Commonly, this will be an initial public offering (IPO), or a potential strategic acquisition, merger, or other similar avenue.

Exit opportunities are an important part of a late-stage investor's due diligence framework as they want to know when they can receive their money back. This is a core driver of financial modeling for late-stage investors since typically an investor’s multiple on invested capital is not as large as in the early-stage. Because of this, an investor will want to pay close attention to their exit valuation estimations as even a small misalignment in expected valuation can significantly impact an investor’s target internal rate of return (IRR).

Secondary sales are also common during late-stage funding rounds. Secondaries incentivize late-stage investors as buyers of the equity to acquire ownership close to an expected exit opportunity IRR with less downside risk compared to early-stage investing. Additionally, early-stage investors take advantage of secondary selling to lock in a return for shares that they’ve likely held for several years.

Market impact on startup valuation

A company’s valuation can also be impacted by the broader fundraising market and economy.

In good economic times, investors may value a company higher because of their optimism for the company’s growth, ability to attract new capital, and their customers’ willingness to spend.

However, in a tighter economic environment, investors may be more cautious with their due diligence given it would be more difficult for the company to achieve the same growth results. We see this often in high interest-rate environments when there are more attractive investment opportunities given the emergence of high-yield investment products.

The ebb and flow of the market can have a material impact on a company’s ability to fundraise. Startups need to reach certain metrics in order to raise the next round of capital, which can be difficult to do in a down market.

Market cycles are heavily influenced by the monetary system and business cycles.

ما يعنيه التقييم لأصحاب المصلحة في الشركة

يحدد تقييم الشركة العوائد المالية لجميع مالكي الأسهم عند حدوث أي حدث سيولة.

على مدار رحلة الشركة الناشئة، يمكن أن تكون أحداث السيولة طرحًا عامًا أوليًا (IPO) أو استحواذًا أو بيعًا ثانويًا.

بشكل عام، تعني التقييمات الأعلى أن أسهم المستثمرين الأوائل تكون أكثر قيمة مقارنة بالسعر الذي اشتروها به.

ومع ذلك، يمكن أن تخلق التقييمات الأعلى مخاطر للمستثمرين في المراحل المتأخرة، لأنه من الأصعب عمومًا مواصلة النمو بمعدل سريع كلما كبر حجم الشركة. وقد تعني التقييمات المرتفعة في جولات جمع التمويل المتأخرة أن المستثمرين يخسرون أموالاً في حدث سيولة يقدر قيمة الشركة بأقل من جولة جمع التمويل الأخيرة.

في النهاية، يتيح لك جمع رأس المال بتقييمات عادلة تتماشى مع أدائك وتوقعات النمو الصحي، مواصلة جذب مستثمرين جدد وتقليل احتمالية حدوث حدث سيولة سيء للمساهمين.

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