So You Want USD 5 Mn Series A Valuation for Your Startup: Some Key Metrics?

Venture Capital: What metrics does a VC look for in a consumer internet startup, e.g., a social networking site to fund a typical Series A valuation ($4m – $5m)?
I would like to know about the metrics such as:

A) How much revenue?
B) How many users?
C) What is the rate of growth?
D) How viral?

Also, please mention if there are any other metrics that VCs look for.

This question was posted on Quora with a request for an answer. This is a question which keeps on appearing at regular intervals in meetings / informal sessions/conferences or in secret whispers where people try to unlock the secret code of VCs on valuation related to a company.

Every entrepreneur wishes to know about those handles / lever-points, which will catapult their startup to get some particular valuation at Angel / Seed or Series A.

So what are the metrics which make us quite dizzy early in the morning and shows us dollar signs all around?

For any company (startup/growth/pre-IPO/listed-stock), any investment round is not the end but part of a journey where whatever enters at one point exists at another, and hence, let me rephrase this question and ask, “What metrics will get a startup USD 50 Mn valuation after 4/5 years?

USD 1 Mn revenue or 5 Mn?

EBITDA multiples 8 / 12 / 40 / 60?

Will you benchmark with Amazon (USD 54 Billion sales / USD 107 Bn EV) or Overstock (USD 1 Bn sales / USD 303 Mn EV) or Facebook / XING / LinkedIn or Groupon or LivingSocial?

Frankly, there is no clear answer as it all depends on the path the team takes it on since one can see from above-mentioned names that valuations differ greatly despite visible success in same vertical.

Web business is winners’ game and it’s 1 or 0 where winners take all, so factor that, and also-ran or 2nd / 3rd companies are valued at a fraction of what winners make.

On a broad basis, valuation is a function of earning and growth. Hence, earning and growth remains the fundamental case as far as financial metrics related to valuation works and all investment opportunities with financial objectives since the key parameters are bound to be valued on the basis of earning and growth only. Hence, there is no reason why a startup as it matures won’t be measured against these two metrics.

However, for Series A, valuation is more a function of many other factors, and in many cases, is also not very dependent on the startup itself and has more to do with market dynamics, investor internal road-maps / goals as well as peer group actions.

Hence, rather than worrying about Series A 5 Mn valuation, think of what it will take to make it a 50 Mn or 100 Mn or 1 Bn company (whatever the numbers are), since Series A valuation is a small stop-over and is not going to change or impact you for few % basis points here and there.

If you get a real bad valuation in Series A and do exceedingly well, Series B will take away all pains of Series A, and if you get very good valuation in Series A and don’t do well, there won’t even be a Series B, and you would end up having good paper stocks which can’t be used even as paper-roll!!!