The market data, reviewed since 1990, indicates that Seed Stage pre-money valuations have fluctuated within a narrow band of between, say, US$2 million and US$5 million. This seeming stability contrasts some meaningful external market forces, such as a major recession, the “dot com” cycle, the “telecom meltdown”, and a few major market “corrections.” That same research also includes data on typical issue sizes, indicating that Seed Stage investors typically own 20% to 30% of the company’s post-money fully diluted equity. The issue sizes are normally between US$500,000 and US$2 million.
Given the relatively few possible outcomes, Seed Stage investors typically use very simple valuation methodologies. Some of the reasons for a more simple approach include:
- The final pre-money valuations will be within a narrow band and will be more affected by negotiating strengths than “mathematical” determinations – with such a narrow band of outcomes, why spend a lot of time on the process?
- Many Seed Stage investors recognize that much of the company’s business plan and product concept will likely change over the next few years. Why do considerable due diligence on aspects that may have no relevance to future value?
- With so much “uncertainty” and perceived risk, Seed Stage investors typically rely on more “intuitive” or subjective valuation models and support their subjective views with reality checks (i.e. due diligence) in a few key areas. Those key areas are typically the main value drivers to the Series A round.
- Seed Stage investors also recognize that, without a lot of substance in the companies upon which to do meaningful due diligence, they should be able to reach an intuitive assessment relatively quickly.
Many Seed Stage investors recognize the “subjective” nature of their Seed Stage investment decisions and expect a high “mortality rate.” To offset this exposure, most Seed Stage investors are prepared to invest in one or two more financing rounds for the more promising investees.
Some “Data Points”
Here are a few “data points” supporting the above summary observations:
- MIT Entrepreneurship Center
- - Research Findings February 2000: Seed stage technology ventures were typically US$500,000 to US$3 million. Pre-money valuations greater than US$5 million required an extraordinarily compelling story.
- The Tech Coast Angels:
- - Website: “we look for pre-money valuations below US$5 million”
- - Presentation March 2002: "sweet spot" for investing is a pre-money valuation of US$1.5 million to US$3 million.
- Sand Hill Angels:
- - Website: invest US$250,000 to US$2 million at a valuation of less than US$5 million.
- New Jersey Entrepreneurial Network Angels:
- - Presentation: Valuation of US$1 million to US$5 million, for 20% to 30%
- Winning Angels, Amos/Stevenson (Noted Book):
- - Most Angel investors want pre-money valuations between US$2 million and US$5 million, with US$2.5 million as the “sweet spot”
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