Why Your Startup Valuation Isn't About Your Worth... And What It's Really About

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📰 Today's Edition: Why Your Startup Valuation Isn't About Your Worth… And What It's Really About

When Elizabeth Yin, our very own co-founder and GP of Hustle Fund, was building her startup LaunchBit back in the early 2010s, she had zero clue how startup valuations actually worked.

Like most first-time founders, she thought valuation was some mystical calculation that reflected how "good" or "valuable" her company was.

Elizabeth assumed if she doubled her revenue, her valuation would double too.

She was completely wrong.

The reality is much simpler and much more brutal: your valuation has almost nothing to do with how much your startup is "worth."

It's all about supply and demand.

Let’s talk about it.

What's Driving Your Valuation?

Valuation is purely a market dynamic. There's a limited supply of your fundraising round (just one company - yours) and varying levels of demand from investors to invest.

When there are fewer investors writing checks, valuations drop. When more investors are competing for deals, valuations rise.

Your competitor might have raised at a higher valuation simply because they hit the market when more investors were active.

Or maybe they are based in a geography where there are lots of investors.

Why Doesn't Revenue Move the Needle Like You Think?

Here's the reality check: revenue helps give more investors conviction, but it's not sufficient for a big valuation bump.

Let's say you're doing $30K per month in revenue. That's genuinely awesome and you should celebrate that milestone.

But from an investor's perspective, you're still extremely far from the monthly revenue they're looking for in a successful outcome - roughly $100m per year.

Elizabeth sees this all the time with Hustle Fund portfolio companies.

Founders with $25K versus $50K in monthly revenue expect their valuation to reflect that 2x difference. But to investors, both numbers are essentially rounding errors compared to what they need for the company to be a success.

How Do Valuations Actually Increase?

Valuations don't increase linearly with progress. They move in staircases.

You stay on one step until you unlock or de-risk something meaningful, then you jump to the next step.

Adding more customers doing the same thing doesn't move you up a step. But proving you can serve a completely different customer segment? That's a new step.

A B2B SaaS company with 20 small business customers paying $500 each wasn't dramatically more valuable than when they had 10 customers.

But a company that proved they could also land enterprise customers paying $5,000? Now we're talking about a different risk profile entirely.

What Actually Moves You Up the Stairs?

The key insight here is that investors are trying to answer specific questions about your business. Each question you answer definitively moves you up a step:

• Can you build a product people want? Your first few paying customers answer this.

• Can you acquire customers repeatedly? Hitting consistent month-over-month growth answers this.

• Can you serve larger customers? Landing your first 1-3 big contracts answers this.

• Can customers stick around? Strong retention metrics answer this.

• Can you expand within accounts and increase sales to existing customers? Net revenue retention over 100% answers this.

Each of these milestones de-risks your business in the eyes of investors. And de-risking is what drives valuation increases, not raw revenue growth alone.

How Should You Think About Your Next Raise?

Instead of fixating on hitting a revenue number, go back to the feedback from your last fundraising process. What specific concerns did investors raise?

• "We're not sure enterprise customers will buy this."

• "Your retention numbers concern us."

• "The market seems too small."

• "We don't see a clear path to $100M revenue."

Your job isn't to 2x your revenue before the next round. It's to systematically address the biggest risk factors that investors identified.

Elizabeth will tell founders if a VC passed on your seed round saying "come back when you have enterprise traction," don't just try to grow your SMB revenue faster.

Go figure out how to land that enterprise customer.

What Should You Focus On?

Valuations seem like they are the work of a magic wand and can be hard to demystify. 

But, focus on “climbing the staircase” by systematically de-risking the biggest risk in your business that prevents you from scaling.

Think in staircases, not lines.

Taking one hippocorn step at a time,

Dunky the flying hippocorn from Hustle Fund

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