How to select your angel round valuation (aka "the $4m rule")

“What should I set my valuation at?” countless founders have asked me. It’s not a perfect science, but since I invest in 30-40 startups a year personally, I probably have better data and first-hand experience than any single human being on the planet at this moment.

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Additionally, since 95% of my angel investments ask to me to syndicate their deals, my check size has gone from $25-250k to $50-$1m, making me the lead or co-lead in my deals.

For example, I recently syndicated five deals on AngelList at one time -- something no one has ever tried. Four of the five deals were oversubscribed, and the final one is on track to close shortly. When you syndicate a deal people sometimes tell you why they passed, so I get massive information from the minds of angels on what they want to back, and more importantly, what they pass on -- and why.

[ Note: if you want to angel invest alongside me, you can apply at jasonssyndicate.com ]

Twenty-seven startups have finished my incubator in the past year and I've introduced each to well over 50 investors, and I always ask those investors, “which two companies are your favorites and why?” Then I watch which ones they actually write checks to -- if any.

During these syndicated deals the founders email me daily -- and sometimes hourly -- asking me, “should I take money from this person?” and “why do you think this person passed?”

Valuation is a huge factor in this game, even if some folks say stupid things like, “If we become the next Uber or Facebook it doesn’t matter!” When they try to convince an angel to invest with this type of salvo, it always looks entitled and clueless. In fact, I’ve heard this from dozens of founders over the years, typically asking for $8-15m valuations or -- even worse -- uncapped notes, and it always makes me think: Marco and Travis didn’t ask for insane valuations for their angel round, and this person doesn’t feel as driven as either of them!

VALUATION IS A MAJOR DRIVER & $4M IS THE LINE

If you’re raising under one million dollars at under a four-million dollar valuation, investors in Silicon Valley are going to put you in one bucket of risk I will call the “gut decision.” They don’t need to see massive traction, but that certainly helps. They don’t need you to have a 10-year track record of building and selling startups, or working at high-growth ones. Of course, a record like that that doesn’t hurt.

In their minds they are putting up $25,000 or $35,000 and getting 1% and that plays to the angel dream of “I put $25,000 into Facebook’s first round, I’m a genius!” In other words, you’re worth the risk.

If you’re raising over one million dollars at over a four-million dollar valuation, investors in Silicon Valley are going to put on their diligence caps and put your business on the examination table and try to make an “educated decision.” The conversations start and end with traction, because if you’re paying $100,000 for 1% of a company, well, you need to know it’s a better deal than putting $35,000 into three startups at roughly $3,500,000. Do you want to own 1% of a more expensive company or 1% each from three less expensive companies that have the exact same chance of a massive exit?

Angels will also take a deep dive into your business model, unit economics, market size and competitors when you put your valuation over $4m, unless they are the dumb tourist money (i.e., “the dentist crowd”) that you see doing “splashy cashy” at demo days over the past couple of years (a.k.a., gamblers pretending to be investors).  

Put yourself in a professional angel’s shoes and then look at your company objectively. Compare your business to the startups raising money at the “classic” range for an angel round of $2.5-$4m and ask, are you 3-4x better? Is your opportunity 2-3x bigger? Is your track record 3-4x better?

That’s what the angel investor is doing, so if the answer is “Yes, I’m 3x better than these other startups because I sold my last company for $25m to Yahoo” or “Yes, my startup has $20,000 in MRR and I deserve more than these other founders who have $2,000 in MRR,” then by all means, go for it.

Now, it would be easy for folks reading this to say, “Jason, you just want ‘yum yum’ valuations for you as an angel.” That’s not the case. I’m just giving you objectively what I see in the market, which is, if you price your startups right, you will close your round easier and get back to work quicker.

When people with more traction come to me to syndicate their deals, or if they’re serial entrepreneurs with track records, the valuations are often $6-15m. I don’t have any problem paying the right price, and that’s the lesson here: be self-aware and price your startup to be attractive to the highest quality investors.

Here is the ultimate hack for understanding what that number is. Have coffee with the angel you want most in your startup and ask the following question: “Cyan, can I ask you for a favor?” [they will say yes] “Would you candidly tell me at what valuation you would want to invest in my startup? I really want to hear what you think the number is. Even a range is helpful.”

They will tell you, and you’ve given them two outs in this language:

1. The word “candidly,” which gives permission for brutal honesty.
2. The word “range” backed up by “helpful,,” which takes the pressure off giving an exact dollar amount.

Do this five times and you’ll know what the right number is.

I hope this is helpful.

Oh yeah, I’m going to spend 12 weeks with seven startups in the next LAUNCH Incubator class. We’ve selected four of the seven, so we have three slots open for folks who want to go through the greatest incubator on the planet. :-)

This Incubator class will end at the LAUNCH Angel Summit, where you’ll get to debut your startup in front of the top 50 angel investors on the planet, while they play poker, shoot clay pigeons and take hikes in the mountains with me. Kind of magical … And a first!

Best, @jason