SeedBlink Blog

Guest post by Dan Gray, Head of Marketing at Equidam.

The greatest source of dissonance in early-stage funding might be around the application of data to investment decisions. Is it an art, or a science? Should we be driven by emotion, or driven by logic? The lack of standards and transparency in venture investing can make this difficult to navigate, with fundraising already a challenge for founders.

On one hand, we’d like investors to be data-driven. We talk about transparency, performance metrics, and the dangers of personal bias. The best-performing funds will understand how growth and capital requirements vary across regions and industries, and will view your pitch through that lens.

On the other hand, early-stage investing is fundamentally a left-brain activity. When you’re pitching an investor your vision, looking three or four years into the future, the key factor in that investment is simply going to be whether or not they believe you. It’s an intrinsically uncertain asset class.

So what role does data really play in valuation; what value can be derived from looking at information rooted in the past?

Fundraising data isn’t always honest

The first caveat is that historical data on funding market activity isn’t really a useful reflection of performance or value; instead, it’s a representation of the perceived value in a particular scenario. Hyped technologies come and go, world events shift the focus on industries, and economic conditions shape the accessibility of capital. All of these factors will change how equity is priced.

Even contemporary examples come with their own set of questions: do the investors you're talking to have the same belief in the potential of that sector? Do they understand it as well? How has the competitive environment changed? These subjective factors will all influence the perceived value of your company and will vary between investors.

In summary, relying on market data to determine the valuation of your startup is treacherous. That said, it can provide a useful perspective, and help you explain how you are positioned relative to others. This is typically the role that revenue multiples play, allowing you to present your valuation in comparison to similar companies.

The second major caveat is that early stage investing is all about finding outliers. You promise huge growth potential in large markets, with an opportunity that is too risky to tap into traditional sources of capital. You’re generally presenting an unconventional solution based on innovation of business model or technology, and your team will typically have some personal connection to that concept.

The specificity of that scenario is precisely what makes you suitable for venture backing in the first place, as opposed to a traditional business. Trends and averages can’t tell an investor anything useful about whether that combination of unconventional factors constitutes a good investment.

The strength of your pitch lies primarily in areas where no comparisons can be drawn. Understanding your competitors is vital, but it doesn’t make sense to build your pitch around your relativity to them.

Data can set the scene

While there are issues with using data to shape the terms of a transaction, with the unreliability of market data and the unique nature of startups, it does allow you to provide important context around the business as a whole. It helps you set the scene for the pitch, allowing investors to understand the potential you are pursuing.

Market size is an obvious example here, but not a particularly interesting one, so go into specifics: what trends in industry data signal growth potential in that market? What is it about the demographics of that region that makes your solution particularly appropriate?

Also important is your ability to sell the impact of the solution you are providing; investors want to see that it is a compelling proposition. What is the revenue or cost-saving opportunity in that market? What advantage does that give prospective clients, relative to their peers?

There’s a good chance, if you’re speaking to an investor with domain expertise, that their focus on your industry or region is because of - or has led to - a familiarity with the data which makes it an attractive target for innovation. They might already know much of the detail that you are presenting.

Rather than making your research redundant, it becomes even more valuable. You are now speaking the same language; proving to this investor that you understand the problem, the industry you’re selling into, and the people you are targeting.

Informing, not determining, value

The bottom line here is that the value of any specific early-stage company should always be calculated in a way that respects the unique nature of the scenario being presented. That’s the only way to approach a power-law-geared investment environment aimed at finding outliers.

Fundraising data, looking at similar deals in order to determine value, became popular during the free-flowing capital era of 2011-2022. That reliance on comparables was crude, procyclical, designed to close deals quickly with aggressive terms, and was a large contributor to the inflation (and subsequent crash) of round prices. While this was going on, founders weren't having to work as hard to attract investors, so they frequently overlooked the crucial context that other types of data provided.

Combining all of this into a rational format, focusing primarily on the ‘fair value’ of the scenario you present and then calibrating it to fit with market expectations, is the best way to approach pricing your fundraising round. If you can put this together in a way that allows you to understand and explain all of the drivers of your valuation (our primary goal at Equidam) you are in a great position to discuss your round with investors.

--

Equidam is an online platform that offers data-driven startup valuation services. By utilizing prominent valuation methods and reliable data customized for diverse industries and countries, Equidam empowers entrepreneurs and investors to truly understand factors influencing their valuation, engage in transparent discusssions, and make informed equity decisions. Learn more about it on equidam.com.