How Startup Valuations Are Actually Calculated
Startup valuations can look arbitrary from the outside. Here's a grounded look at how they're actually determined.
Unlike a public company with a share price set by continuous trading, a private startup's valuation is essentially negotiated between founders and investors based on a mix of concrete metrics and future expectations.
What actually goes into the number
Current revenue and growth rate, comparisons to similar companies that raised funding recently, and the specific investor's belief in the company's long-term potential all factor into the number, weighted differently depending on the company's stage.
Why early-stage valuations are especially subjective
A very early startup often has little or no revenue to base a valuation on, so its number reflects investor conviction about the team and market opportunity far more than any hard financial metric, which is why early valuations can vary widely between different investors evaluating the same company.