Angela Tran, General Partner at Version One, decodes how venture capitalists determine the value of an early-stage startup

A startup’s valuation—the numerical representation of its perceived worth—is not only a cornerstone of entrepreneurship, but also a reflection of its potential trajectory. Guided by things like market trends (or “heat” in VC vernacular), financial metrics, and qualitative assessments, valuation is the bedrock upon which future fundraising, ownership stakes, strategic choices, and investor relationships are built. As you embark on the journey of determining your company’s value, a myriad of considerations come into play, including both tangible metrics and intangible narratives.

This dichotomy is at the core of a recent webinar for RBCx clients on “The Art vs. Science of Valuations: How Your Capital Stacks Up.” Host Laith Shukri, Director of Ecosystem Engagement at RBCx​, teases out investor insights from seasoned VC Angela Tran, General Partner at Version One Ventures (of which RBCx is a Limited Partner), to help unravel the elusive concept of appraising early-stage enterprises in a fluctuating environment. If you missed the fireside chat or simply could use a recap, here are six key takeaways.

1. Early-stage valuations typically fall under a market range

Early-stage companies with perhaps little more than a business plan and a prayer tend to display a unique characteristic: less variability in their valuations. This can be attributed to the nature of early-stage investments where the market usually plays a more pronounced role in shaping valuations. With limited historical and financial data to draw on, investors rely more heavily on prevailing market rates and broader industry benchmarks.

For a rough-and-ready range, Angela says that in her experience, you can expect valuations between $5 to $10 million at pre-seed and $8 to $20 million at seed stage, with a 20 to 25 per cent dilution. “At the early stages, there’s really no traction, so anything lower or higher would be pretty atypical,” she explains. “Having that market standard also means negotiating for things that are pretty small doesn’t mean much until you’ve really scaled, and deals can get done super quickly.”

2. Founder strength, team, and execution are everything

Behind every valuation figure lies the prowess of a founding team. Investor confidence can be bolstered by your team’s track record, expertise, and vision, which, for most VCs, is assessed by reference calls and standard funding due diligence. At Version One, this looks like passion, being mission-driven, company DNA, and ensuring all the elements of a comprehensive team are in place, from technical to business to storytelling, and that founders are “learning and execution machines.”

Beyond these qualities, Angela always asks herself whether she would quit her job to work for you. “Because at the end of the day these are people,” she explains. “If I can’t imagine myself working for a CEO I’m investing in, then how is that person going to recruit an entire team to build that vision?”

3. Determine your value driver

Identifying your company’s value drivers—the pivotal elements propelling growth, market capture, and competitive edge—is akin to dissecting your startup’s DNA. Whether it’s a breakthrough technology, a disruptive business model, an untapped market segment, or an exceptional team, aligning valuation with value drivers helps to not only substantiate the numbers, but also ignite the investor’s imagination about your startup’s potential journey—one characterized by tangible growth, competitive resilience, and lasting impact.

“As an investor, I would ask the entrepreneur what is the number that you put up on the wall and look at every single day that is the lifeline for your company?” says Angela. “If you don’t know why you’re successful, you’re not going to know why you’re not doing well.”

“As an investor, I would ask the entrepreneur what is the number that you put up on the wall and look at every single day that is the lifeline for your company? If you don’t know why you’re successful, you’re not going to know why you’re not doing well.”

4. Know your why now

Aligning your venture’s value proposition with market demand and trends is crucial for a successful valuation but, Angela argues, macro tailwinds aren’t always enough. “We have to understand and feel conviction around the urgency of a buyer,” she says, citing the example of green tech. “We all know we’re in a climate crisis, but because everything is so voluntary and regulations haven’t been set, buyers can wait. So, while we all feel the macro need, on the micro buying level, we can’t answer the ‘why now’ for customers. They’re not desperate enough.” Ultimately, knowing the ‘why now’ not only elevates your startup’s valuation potential, but also positions it strategically for growth in a dynamic landscape.

5. It’s okay to take money off the table

Venture capitalists increasingly recognize the importance of founder well-being in the high-stakes world of startups. Opting for a valuation that prioritizes your personal well-being over short-term financial gains reflects a mature and balanced approach to entrepreneurship. Indeed, it can foster a more collaborative, resilient, and forward-thinking startup ecosystem. “As investors, it’s important to support founders’ mental health and personal wellbeing so that they can add a little bit more stability into their home life,” she says. “As long as the founder continues to have a significant stake in the company so that everyone’s interests are aligned.”

6. Aim high (just not too high)

A high valuation can be the holy grail for many small businesses, but beware of one that’s excessive to the point of being unrealistic. The pressure to meet lofty valuations can result in rushed decision-making, misallocated resources, and even compromise long-term strategic goals.

Moreover, it can hinder subsequent fundraising efforts if you struggle to meet the expectations associated with the valuation. The risk of a “down round,” where a subsequent funding round values your venture lower than the previous one, can lead to VC skepticism and, as Angela suggests, risk delaying the inevitable. “When thinking about a high versus low valuation, the more important issue is to optimize for dilution,” she says, “because it doesn’t matter how much your company’s worth if you own nothing.”

“When founders are thinking about a high versus low valuation, the more important issue is to optimize for dilution, because it doesn’t matter how much your company’s worth if you own nothing.”

Unlocking a favourable valuation is never straightforward for any company. But, for early-stage startups especially, a holistic approach that intertwines quantitative metrics with qualitative narratives is key. While startup valuations remain an ever-evolving journey, a smart blend of financial prudence, strategic foresight, and eloquent storytelling can pave the way for a valuation that truly captures your startup’s promise.

We want to thank Angela Tran for sharing her valuable insights, as well as our engaged attendees for their active participation in this webinar. Please look out for more online and live events in the coming months to help new founders succeed in their startup journey, and visit our RBCx Ideas blog for more learning resources.

RBCx backs some of Canada’s most daring tech companies and idea generators. We turn our experience, networks, and capital into your competitive advantage to help drive lasting change. Speak with an RBCx Advisor to learn more about how we can help your business grow.

This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.


Other articles you may be interested in