Reading Brooklyn-based Jordan Cooper’s blog post about market changes in seed stage valuations got me thinking about comparing his guidelines to what we might see in the South or more particularly Atlanta. He makes the point that an entrepreneur who strays too far outside these ranges is showing warning signs of bad judgment. But, there is some guesswork in the process, and in our region we are more prone to number crunching than buying into concepts.

I encourage you to read his full post, but I’m going to borrow his structure here for my purposes.

Still at Your Old Job

He says don’t bother, even if you have a prototype. He would assign no value to a deal where the founders aren’t ready to take the leap on the expectation of raising money.

I certainly see a lot of deals where the founders are at least doing contract work to put food on the table, and I don’t think that is unreasonable. Great first-time startups can come from older individuals (30ish!) already with families but without prior wealth-creating exits. It is not unfair for people in that category to give priority to family needs and try to bargain for funding in advance of taking the big leap. That move is still fraught with risk for the entrepreneur. Maybe that idea is worth $1M pre-money if all other factors are in alignment, but it’s friends & family money only and not ready the formal angel and VC markets. 

Pre-Product

You are fully engaged in the business, know the space, and have some way to demonstrate the product. Jordan likes $2M-3.5M, but only if you as the founder have a proven track record as an entrepreneur. Otherwise you have more work to do building prototypes and gathering early customers to validate your concept.

That valuation range in our area generally means a working product with some customer traction, as in at least Beta customers paying real money. (See my post on the ATA guidelines.)

I’m not sure this is much different than the “still at the job” value, perhaps $1M. And it’s still probably limited to friends and family.

Prototype Built and in the Market

You have a team and have built something that is getting tangible feedback, good or bad, from the market. Jordan thinks this is the optimum time to raise seed money and that a $3M-$4M valuation is reasonable. He defines this seed round as $400K-$1M.

I would tend to agree that this is the stage where value steps up and you can step out to the angel markets and perhaps to VCs who will play at this level. This is, of course, provided that what you are learning from the market is confirming of your concept.

Again, though, our investors like to see money coming in more so than followers being counted. This circumstance falls between the seed and Series A categories favored locally, and raising the money will be very difficult at any valuation. I’m not saying it’s impossible, but you will have to show an ironclad path to real revenue.

Product in Market and Signs of Growth or Revenue

You’ve been in the market a few months with users either proliferating or paying for your product. The team is in place and accomplishing the job. You have proven many of your assumptions and seem to be on the verge of something good. You need an 'A' round to see if you do in fact have the makings of the proverbial hockey stick.

Jordan defers this valuation to the VCs. I’ll take a stab and say that if you need $5M at this point, your pre-money valuation has to be north of $10M. To accomplish that locally, again you’ll have to have a bulletproof spreadsheet that shows how you will monetize what you’ve achieved.

There are areas like Consumer Internet where the assemblage of big audiences accompanied by big buzz creates real value, even if the revenue model is not totally perfected. Take those deals to San Francisco or New York. Local investors have plenty of “hard money” deals to accomplish their return objectives and aren’t always compelled to swing for the fences. And, they have areas of expertise where they are more comfortable in making judgments. They’re doing the right things on behalf of their limited partners and behaving entirely rationally for this area. They’re to be commended for that.

The bottom line is that some of the valuation rules are the same across geographies and sectors, but many are different. You simply need to take your deal where it most closely matches investor criteria.