Valuing a technology company for fundraising: The ten factors that set your number

2. The team

The team an investor is buying into is one of the biggest determinants of the valuation they are willing to pay. A venture investor needs to believe the business can grow far beyond where it is today, which means the team typically must include:

• A visionary leader who can see beyond where the industry is today and move the business toward where it is going.
• Someone who can open doors with new customers and someone who can close them. These are often different skills, and sometimes different people, particularly in regulated sectors such as finance, food, or selling into a supermarket, where the character who opens the door is rarely patient or detailed enough to close it.
• Someone who can build the product, whether that is a strong Chief Technology Officer or a product designer.
• Someone in operations who joins the other pieces together.

Ideally, at least half of the team has done this before at scale and ideally made someone else money along the way. A common weak spot is when the right people have been identified but are not yet in the business. Promising to join after the raise is fine in principle, but it depresses the valuation rather than creating value, and a team that knows the theory but has never done it in practice is a similar concern.

4. Industry dynamics: the best owner principle

Industry dynamics ask what other sellers in the market do, and how easily they can deploy capital to compete. Some industries are stagnant and ripe for disruption, while others are already hyper dynamic and constantly innovating.

This is where the best owner principle comes in. The question is not just whether a product or idea works, but who is best placed to own it. If the answer is a disruptive business with no legacy ties or inefficiency, that is a strong position. If an established player could replicate it quickly with better access to data and a bigger sales operation, investors become nervous. It does not necessarily stop them investing, but it depresses the valuation, because the best owner might already be someone else.

6. Risk to value: who the investor is, and the risk-free rate

The most common investor pools include:

• Venture capital funds
• Venture capital trusts
• Angels and angel networks
• Corporate venture capital
• Family offices and private equity funds

These groups each have different expectations of how and when they make money, but most generally want their capital out within three to five years through a capital payment on exit, as opposed to income along the way. Two factors outside the management team’s control then shape how an investor prices that risk:

Volatility: Some sectors see very stable EBITDA and revenue multiples on sale, and others see a lot of fluctuation. Technology sold into utilities tends to be stable, because utilities companies themselves are stable, while technology sold into marketing agencies tends to be volatile, because marketing agencies are volatile. The management team has done nothing wrong in either case, but an investor pricing in a possible trough at the point they need to exit will push today’s valuation down to protect themselves.

Risk-free rate: This is often one that founders underestimate. UK and US government bonds are currently paying in excess of 5 percent over 10 to 30 years. When an investor’s investor can get most of that return risk-free, capital tends to flow toward the safe option, which pushes down the valuation offered on venture deals. The main exception to this is ultra-high net worth angels who can be less sensitive to the risk-free rate than funds with fiduciary obligations who are investing other people’s money.

8. How options and growth shares work

Investors typically invest on a fully diluted basis, which means the management team has to think upfront about how large an options pool it wants to set aside for staff and other directors, often as much as 20 percent of the share capital. It is rare for the incoming investor to be diluted by that pool, and in practice, it almost always dilutes the shareholders who already held shares before the fundraise.

Management teams and early angels often forget this and are then frustrated to find they carry the future dilution alone, even though the resulting incentives create value for everyone. It is worth asking directly whether a headline, fully diluted valuation understates how much of that value the existing shareholders keep.

10. Money multiple return

Money multiple return, often shortened to MMR, is simple in concept: for every pound an investor puts in, how many pounds do they expect to get out. It helps to separate economically rational investors, who are investing someone else’s money and expect a specific return, from economically irrational investors such as friends and family, who back the person rather than the numbers.

Price Bailey’s guidelines for reasonable returns to economically rational investors are as follows:

• Angels should typically seek 7 times to 15 times returns, while aiming for 50 times or more, and recognising that rare outliers can deliver returns of 100 times or higher.
• Venture capital funds and venture capital trusts usually present investment committees with a downside case of 3 times, while really targeting 5 times to 10 times depending on where their capital comes from.
• Private equity funds typically model a downside case of two and a half times and are very happy achieving 5 times or more.

A founder can inflate the money multiple return simply by pushing up the assumed exit valuation, which is why the exit multiple must be realistic and benchmarked against genuinely comparable trade sales on revenue or EBITDA terms. This connects directly to point six: the same volatility and risk-free rate pressures that shape today’s valuation also shape what a credible exit multiple looks like.