VC Myth 01: Valuation of the Idea

Myth: Most entrepreneurs tend to focus extensively on the value of their enterprise, creating elaborate storyboards, extrapolated discounted cash flow models to demonstrate the net present value of their future projected revenues.

In early-stage venture capital financing, the concept of valuation is simply a surrogate - it is more about the percentages and ratios. The typical post-financing value share for a company's initial venture capital financing breaks down as - 

• Main (Lead) VC: typically insist on owning close to 20-25% of all early-stage portfolio companies
• Co-Investor VC: Most VCs prefer to invest alongside a co-investor, which is favorable to both the investors and the company. Here too, a typical 20-25% must be given off, here as well
• Option Pool: negotiating the size of the option pool is a surprisingly effective back-door way of negotiating valuation, as part of the "pre-money" valuation equation, which constitutes 15-20% share of the company
• Founders: taking into perspective and consideration the above dilutions, the founder entrepreneurs are left with almost 35-40% of the company

Unlike valuations of later-stage companies, valuations of early-stage companies do not fluctuate with the financial markets, but economic downturns do have an impact in the number of early-stage companies getting financed, and those who brave the winters and autumns, succeed in smaller funding amounts than would have been otherwise.