One of the first challenges startup founders face is answering a deceptively simple question: What is my company worth? Whether you’re licensing a patent, working off an idea scribbled on a napkin, or preparing to pitch investors, understanding your company’s value is critical — especially if you’re looking to raise funding.
As founders, however, we’re often terrible at answering this question objectively. It’s natural to overvalue your company because, to you, it’s more than just a business—it’s your baby. You envision it growing into a billion-dollar company, and it’s hard to imagine it being worth less than your aspirations.
But in reality, your company is only worth what the market says it is.
Let’s explore how to determine your company’s value, why it’s so challenging early on, and what to do when the market’s valuation doesn’t align with your expectations.
The market sets your company’s worth
Valuing a startup in its early stages is inherently difficult. Without revenue, traction, or clients, how do you assign a number to an idea or potential? As tempting as it is to rely on your own expectations, the truth is that the market ultimately dictates your company’s worth.
If you believe your company is worth $10 million but every investor you pitch either declines to invest or offers a valuation of $1 million, then the market is telling you that your company is worth closer to $1 million — or even less.
While this can be a tough pill to swallow, it’s crucial to pay attention to the feedback you receive from investors. If you’ve pitched 100 investors and consistently hear the same valuation, that’s the market speaking. Ignoring this reality can cost you valuable time — time you could be using to grow your business.
How the market determines your valuation
Valuing a company often starts with envisioning its future potential. For example, let’s say you’re in the contract research industry, and you project your company could eventually generate $100 million in revenue with a 20% profit margin. That would give you $20 million in EBITDA (earnings before interest, taxes, depreciation, and amortization).
If companies in your industry typically sell for 15x EBITDA, your future valuation could be $300 million. But this is your terminal value — where you hope to be in 10 to 15 years.
To calculate your company’s worth today, you need to work backward:
- Set a Growth Trajectory: Let’s assume you can grow 20–30% per year.
- Estimate Mid-Term Revenue: In five years, you project $10 million in revenue and $2 million in EBITDA. At that point, your company might be worth $20–25 million.
- Calculate Investor Returns: Early-stage investors often expect a 10x return on their investment, given the high risk. To achieve this, your current valuation would need to be around $2–2.5 million.
- Account for Additional Funding Needs: If you need further rounds of funding, your current valuation could drop even more, perhaps to $1 million or less.
By working backward from your terminal value and factoring in growth rates, risks, and investor expectations, you can estimate what your company is realistically worth today.
The founder’s dilemma: Ego vs. Reality
As founders, it’s easy to fall into the trap of overvaluing your company. You believe in your vision, your product, and your potential l— and you should. But clinging to an unrealistic valuation can hurt your startup in the long run. Here’s why:
- Missed Opportunities: If you hold out for a higher valuation, you may spend years searching for an investor, only to fall behind competitors who are already scaling.
- Lost Momentum: Building a startup is a race against time. Waiting too long for the “perfect” deal can stall your progress and erode market interest.
- Burned Bridges: Investors talk. Repeatedly rejecting reasonable offers can damage your reputation in the investment community.
When my biotech company first sought funding, we thought we were worth far more than the market said. After pitching dozens of investors, we received two offers: one valuing us at a few hundred thousand dollars and another at $1 million. While it wasn’t what we hoped for, we took the deal and moved forward. In hindsight, accepting the market’s valuation allowed us to start building the company instead of wasting time chasing an unrealistic number.
How to approach valuation objectively
To avoid falling into the trap of overvaluation, consider these steps:
- Talk to Many Investors: The more feedback you get, the better you’ll understand what the market values.
- Research Industry Benchmarks: Look at comparable companies in your space and their valuation multiples.
- Focus on Your Path: Set a clear growth trajectory and demonstrate how you’ll reach your terminal value.
- Be Flexible: Recognize that early-stage valuations are about potential, not guaranteed success.
Most importantly, remember that valuation is just a starting point. If you believe in your company’s trajectory, a lower valuation today isn’t a loss — it’s an opportunity to prove the market wrong by building something incredible.
Final thoughts
Valuing your startup is one of the hardest parts of being a founder. It forces you to balance your vision with the cold, hard realities of the market. But if you’re willing to listen to feedback, trust the market, and make the most of the opportunities in front of you, you’ll set yourself up for long-term success.
If you’re navigating the challenges of valuation or early-stage funding, I’d love to hear your thoughts and experiences. Let’s start a conversation.
Michael Johnson is the president of the New Jersey Innovation Institute.
