Valuation Tool: Background

Please try out the demo of our automatic valuation tool. It doesn't take long to fill out and we'll give you an estimated pre-money valuation in seconds!

The goal of this technology is to make it easier for seed stage technology startups to get funding. After some pilot investments with incubator partners in Q4 of 2011 and Q1 of 2012, RSCM plans to use this tool to rapidly fund companies across the US over the Internet. To improve the user experience, we want to start getting feedback.

Also, we know valuing seed-stage startups is a big challenge. It’s one of the most common questions people ask us. So we figured it would be helpful for technology entrepreneurs and investors alike to have a quick and easy way to generate a straw man valuation.

Who Will it Work for?

Our valuation tool is designed exclusively for seed stage companies. It should provide fairly accurate results for startups that meet the following criteria:

• Are somewhere between an idea on paper and generating initial revenues
• Are raising a funding round of $500K or less
• Have raised less than $100K to date

The farther a startup is outside this envelope, the higher the expected error of our estimate. Also, the valuation tool is calibrated to national funding trends. It makes some adjustments based upon geographic location, but it might not produce estimates consistent with local market conditions if your area tends to have very high valuations in some sectors (e.g., the San Francisco Bay Area). Finally, we're not sure how well the tool works for startups with 1 or 5 founders. Angels fund such startups less frequently so we're not sure how well calibrated our estimates will be in these cases.

What Factors Does Your Valuation Tool Take Into Account?

We use two sets of criteria. First, we look at the experience of the founders. Second, we look at the progress of their startup. This approach allows us to make tradeoffs—we don’t have to rely on an “ideal” profile. We’d be happy to fund a group of founders that just finished high school, if their startup has delivered a beta that has strong user traction. We’d also be happy to fund a startup that is simply an idea on a napkin, if the founders all have lots of relevant experience.

Our goal is to be able to quickly and consistently calculate a valuation for a given founding team at an earlier stage than anyone else. To evaluate founders, we look at objective measures of management, technical, and entrepreneurial experience. We also give some minor consideration to whether they attended top undergraduate or graduate schools.

What’s the Economic Basis for the Valuation?

We believe the primary source of value in a seed stage company is the highly subsidized labor that the founding team puts into the company. So we start out by looking at the fair market salaries of the founding team. We then take into account the past experience of each founder, as well as any progress the startup has made to date.

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