For a long time, the standard has been for founders to let their lead investor worry about deal terms like valuation. We accepted that valuation largely relies on comparables and market conditions, where investors have a more valuable perspective. Especially the case at early stages, where investors could combat uncertainty with experience.

Perhaps what we’re really talking about here is pricing, not valuation. What is the market willing to pay for that amount of potential return, with the associated amount of risk?

It’s entirely possible for founders and investors to arrive at the same number. What prevents this from happening, most of the time, is information asymmetry. The investor is more familiar with the market, and the founder is more familiar with the business.

How can we reconcile the two more effectively? The answer is simple: both sides participate in the process of valuation, which ultimately helps to determine pricing.

The value of founder-led valuations

So now we have to consider the concept of founder-led valuations. Lacking in familiarity with the market’s appetite for their particular opportunity, founders are likely to produce something which resembles ‘fair market value’, trying to determine an ‘objective’ view on the value of their startup.

Does ‘fair’ have any relevance to valuation? How do we achieve an objective view on startup value, and is it useful to the fundraising process? Isn’t every founder just going to present the best-case scenario with unlikely projections?

All very valid questions, and to answer these you have to change your perspective on what a founder-led valuation is trying to achieve. It is not (or, should not be) an attempt to definitively set the price of the startup’s equity. It is to answer the most important question:

“The only question that matters when you invest in an early team:
what happens if things go right?”

Eric Bahn, Co-Founder & General Partner of Hustle Fund

Is the founder going to present the bull case for their company? Of course, and that’s precisely what you should expect. It doesn’t mean that’s where you close the deal, it just crystalizes the decision around a few key questions.

  • If everything goes well, is this outcome possible?
  • Based on your read on the founding team, how realistic is this?
  • Fundamentally, does it demonstrate that they know what they are doing?

Valuation is a means, not an end

A familiar observation: founders, particularly those who pursue venture capital, have to be exceptional storytellers. What’s less well understood is what makes a compelling startup story.

One major piece of the puzzle is to understand that some of your listeners will be driven by narrative (pathos), and some people are driven by numbers (logos). The most powerful stories combine both.

“Every part of your story should have an associated number,
and every number should have a story.”

Aswath Damodaran, Professor at NYU Stern School of Business
(and Wall Street’s ‘Dean of Valuation’)

The majority of founders are pretty good with the narrative part of pitching investors, because it’s been a fundamental part of the toolbox for so long. They want to be perceived as charismatic, and they want to be able to influence people with their message. But the narrative is just half of the story.

Valuation is the companion to this narrative, quantifying the story in a practical (and hopefully IPEV compliant) framework. It allows a founder to present the best-case for their vision in financial terms. It allows you, as an investor, to scrutinize their story against projections and industry-standard measures.

The three questions above give you a broad picture of whether it’s an investable company, and how much you might want to discount the proposed valuation. A particularly rational founder may be aligned with your doubts and concerns, so the discount is zero – but that’s not necessarily a good thing. An incredible optimist might be some way out from your position – but that’s not necessarily a bad thing.

The important thing is that the process reduces the information asymmetry between you and the founder. It opens up the black box of valuation, and lays bare the key drivers and assumptions for scrutiny and discussion.


For investors, startup valuation is typically an exercise in pricing. For founders, it is typically an exercise in explaining. That may sound oversimplified, but it points toward the key objective each side has when approaching this topic. There are two challenges here: the first is simply that the objectives aren’t totally aligned, and the second is that – while both objectives are valid – they each only achieve part of the ideal outcome.

  • Left to investors, valuation is too shallow a process that is often too easily influenced by market trends.
  • Left to founders, valuation represents a fragile bull-case without due consideration for market forces.

When both approaches are combined, with honest and transparent deliberation, it produces a much more useful view on company value which encompasses market considerations, specifics of the scenario, and a shared vision for the future.

As always, we’ll repeat the message that valuation is a fundamental driver of how capital gets allocated to innovation; which ideas and which founders get funded. It’s a discipline worth our time contemplating, and worth the effort to improve both in efficiency and outcome.