Fundraising · Y-Combinator

How do you evaluate the worth of your idea/company for seed funding?

Lauren Rea Bioinformatics Analyst at Innovative Products Research & Services, Inc.

December 10th, 2016

I read an article from Y Combinator that lists several reasons why startups fail. One of those reasons is asking for too little or too much funding. I want to know the best practices for evaluating the monetary worth of an idea or a startup, in order, to fundraise the appropriate amount of capital. 
More than 65% of new companies fail because they lack funding. In this course, you’ll learn common fundraising mistakes, how to nail an elevator pitch, how to craft a killer pitch deck, where to source investments from, and all about term sheets and convertible notes.

Dimitry Rotstein Founder at Miranor

December 10th, 2016

You're missing the point. It's not about how much the idea is worth (no one knows that in advance anyway) - it's about how much money you NEED to turn the idea into a success. If you have too little, you'll go broke before succeeding, and if you have too much, then you'll go crazy and waste it on unnecessary things, overextend yourself and go bankrupt. So you need to know exactly how much you really need, and for that you need to know exactly what the money is for. That's what any serious investor will ask you, expecting to hear a very detailed answer based on facts and established figures, not dreams and guesses.

Thomas Sutrina Inventor at Retired Pursue Personal interrests and family

December 11th, 2016

You have a idea, an egg.  Value as an egg is ZERO.   As everyone has been saying the money you need is to get it hatched.  That is the immediate effort and the money and time you are seeking.  But the people providing the money to hatch the egg look at two things.  Are you capable of hatching the egg, and what is the chances of the egg actually hatching?  They know a percentage with the best hatching plan will not hatch. 

The Next question is simply is the content of the egg have enough value to cover the costs of hatching for itself and the failures (that percentage)?  What are the chances it will have a value many times the costs of hatching?   If it does have a value many times more then hatching?  Does is also have a value many time more then the cost of actually being capable of delivering this higher volume?  The competition may have put up such high cost of entry that a better product can not still succeed on the market.  (that is what Nobel did to stay in control of explosive manufacture for decades)   Basically is the egg worth the risk? 

You have to answer both questions about hatching to get investors in your egg hatching.  He still has not got his money back with interest until the last question is at least positive or leaning strongly positive.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

December 10th, 2016

There is little connection between the value of an idea and the capital needed to prove whether it's a good idea or not. If you believe your dream, do the work to determine how much you'll need to raise.

Michael Walsh Founder & CEO at EVO.WORLD

December 11th, 2016

I think using the "Hatching an Egg" terminology is too scrambled.

It started sounding too much like an omelette.

Rill Hodari

December 11th, 2016

I will share a market research perspective in that in your pitch, you are outlining the total addressable market by virtue of what problem would your product or service solves and what current product(s) or service(s) would your solution replace.  What is the current value of that market?  How many competitors exist in that market?  Your ability to get a piece of that market (with a good execution team) is the size of the prize for the investment.  What primary research (whether in-market test, purchase simulation, focus groups, surveys, etc.) have you conducted to examine potential users' interest in your solution?  How do these figures enter into your projected financial models for adoption?  I do agree with most of what what has been said regarding the "value" of just an idea, but the due diligence around the idea looks like what I just described.  

Many consumer product companies build volume estimation models to gauge market response and revenue on a new product prior to launch.  Startups (especially tech startups) can be too unpredictable to build a precise mathematical model on exactly how many units will sell based on marketing spend, but you can use some similar analytic tools to mitigate some risk.

Rob G

December 12th, 2016

Lauren, i think your question, or at least the assumptions surrounding your question, are flawed.  It is highly unlikely that you will raise funding based strictly on your as yet undeveloped idea. So the market has already given you 'best practices' for valuing you idea and the answer is $0.00. Or put another way, the investment risk is so high as to make the 'idea' unfundable.   If you are a successful entrepreneur with prior exits that produced good results for your investors then that's a different story.  As you reduce the risk by building a business around the idea then there will come a point where the business has value.  Do your homework, Build a team that has a good probability of executing, get some customers, build a prototype or MVP.  Each of these steps ads value and reduces risk and with all of those steps completed you might eventually have a business that is investable. The 'valuation' at that point is more about the city you are in and the 'typical' seed stage valuations in that area. It's not a lot more scientific than that.  There are a hundred different ways to calculate a valuation of a VC fundable startup but it usually comes down to the area averages for 'similar' companies. 

David Austin Relentless problem solver and innovator.

December 10th, 2016

Regarding your question "how to protect my company in a case of not being able to return on investment." ... you can't. If you don't provide the required ROI your startup is dead. I'm not sure why you'd want to do that anyway ... if the model doesn't work then it doesn't work and you'll be miserable milking a cow that eats more grass than it's milk is worth.

Alejandro Cremades I am driven by solutions to very complex problems.

December 13th, 2016

The best way to do this is to first understand if you have a product that people want to use (product market fit). If that is the case and you are experiencing month over month growth then the next step would be to take a look at your market. See at what valuations your direct and indirect competitors are rasising capital and try to find a valuation that would be in between. Something that would be fair to you and your investors.

Arthur Lipper Chairman of British Far East Holdings Ltd.

December 10th, 2016

Determine the reasonable return on an IRR basis the investor would consider satisfactory and then use to understand the ramifications.

Arthur Lipper Chairman of British Far East Holdings Ltd.

December 10th, 2016

A royalty is an obligation to share revenue. It is not, unless specifically agreed, a debt. If the freeness are insufficient for royalty payments to meet the agreed levels of revenue / royalty payments, then the ownership of the intellectual property may be transferred to another company wishing to pursue the same objective. Arthur