Understanding startup valuations: A CFO’s guide for founders

Valuation is one of the most misunderstood and opaque startup topics. Many founders either fixate on achieving the highest number possible or defer entirely to investors. 

Both approaches can be dangerous. 

Your valuation dictates how much ownership you retain, how attractive you are to investors, and how viable future fundraising rounds will be. Overvalue your company and you may find yourself in a down round nightmare later. Undervalue it, and you could be handing over too much control too soon.

In this guide, we’ll explain how you can find that balance, based on our work as CFO advisors to 300+ startups.

When do I need a valuation?

You’ll need to know your startup’s precise value at the big inflection points. For example, when raising a priced round, such as a Seed, Series A, or during later-stage equity financing, where investors will expect to negotiate a valuation to decide ownership and dilution. 

It is also useful in other situations. While convertible notes or “SAFEs” may not require an explicit valuation, any caps and discounts create an implicit valuation that can impact your future fundraising. Or consider M&A transactions. You have to know your startups’ value to secure a fair price. 

Beyond fundraising and acquisitions, you might also need a valuation to determine employee equity compensation, generate complete financial reports, or comply with regulations.

The two ways to value a startup

Unlike public companies, which are valued on tangible financials, startups—especially early-stage ones—require a different playbook that factors in the future potential of their rapid growth. There’s no single formula, but rather a mix of approaches investors and founders use to arrive at a number.

The multiples method

The multiples method looks at cash inflows and is the standard for revenue-generating startups. For public companies and mid-to-late stage startups in established industries following common business models, this is fairly easy to track.

Two options: 

1. Subscription model (SaaS): 8-15x ARR
For example, ChatGPT’s premium plan, Microsoft 365’s subscription plan, or Adobe Acrobat subscription plan.

2. Transactional take-rate model: 1-5x Net Revenue
In other words, what percentage of a marketplace does your startup keep? Examples: Airbnb, Uber, Doordash where the take rate is a percentage of net revenue vs gross transaction volume (GMV)—in the 20-30% range. Or, Brex, which charges a 2.7% interchange fee based on GMV.

You will notice that multiples have quite a range. What influences them? 

Revenue growth

In the technology industry, revenue growth is everything and higher growth rates command higher multiples. During the Zero Interest Rate Policy (ZIRP) era, investors prized hypergrowth over everything. In 2023-2024, as interest rates rose and capital became scarce, profitability metrics like the Rule of 40 took center stage. Now, the pendulum is swinging back: growth is once again the dominant valuation driver.

AI companies in particular, are expected to exceed the traditional SaaS Triple, Triple, Double, Double, Double (T2D3) model, shifting towards T3D3 (Triple, Triple, Triple, Double, Double, Double) or even higher. OpenAI’s revenue trajectory exemplifies this. In less than two years, it went from negligible revenue to a multi-billion ARR business, driving unprecedented investor interest and valuation premiums.

One of the biggest mistakes we see founders make is assuming that all growth rates are evaluated the same way. Growth expectations are highly dependent on stage (these are our opinions):

• Early-stage startups (<$50M ARR): 50%+ YoY growth is a baseline. Anything lower raises red flags for investors.
• Mid-stage startups ($50M-$200M ARR): 30-50% growth is strong but expected
• Late-stage startups ($200M+ ARR): Growth slows, and margins and profitability become more important

All that said, growth alone is not sufficient for an ultra high valuation. Today’s investors are scrutinizing your unit economics alongside growth. Growth without a path to long-term profitability is unsustainable, and not a story you can tell. You need additional, healthy metrics like lifetime value to customer acquisition cost (LTV:CAC)—ideally 5x or higher for top quartile startups.

Gross Margin

Gross margin serves as a proxy for long-term profitability. Startups are more likely to burn cash than generate profit largely due to the intensive opex required to develop and launch products, as well as the lack of efficiencies gained through scale. Therefore, gross margin is a normalized metric across companies of all stages that investors use to predict profitability when a startup eventually finds scale.

Higher margins lead to higher multiples. SaaS companies with 80%+ margins command premium valuations, while transactional businesses—which are often structurally limited to 30-50% margins, like Doordash—trade at lower multiples. They often have multiple layers of fees, but  more costs. Doordash splits the order value with the restaurant (30%) but then incurs delivery costs. Therefore the gross margin is in the 40% range.

AI businesses are something of an exception. They are often in the 50-60% gross margin range, yet still command astronomical multiples, higher than SaaS even, because of growth exepctations. Investors believe they’ll improve their margins and 

Read: 3 KPIs to tell our AI startup’s value story.

Business Model

Ever wonder why ChatGPT launched a subscription model instead of charging per query? Your revenue model fundamentally impacts valuation. Subscription-based businesses typically receive higher multiples (8-15x) than transaction-based ones (1-5x). Why? Because the revenue is predictable.

Subscriptions provide a stable stream of recurring revenue and predictable cash flow. This allows investors to more accurately forecast future revenues based on the existing subscriber base.

In contrast, businesses relying on transaction-based models generate revenue at the point of sale, which can be volatile and dependent on customer retention and additional acquisition efforts.

Subscription companies can quite reliably use LTV:CAC as a proxy for how efficiently they are acquiring customers. But it’s a SaaS metric and assumes renewal and acquisition costs are minimal, and that most subscribers will simply continue paying. That’s less true for transactional model companies like those who run marketplaces and must continually retarget and reengage customers. LTV:CAC is a great metric for proving your valuation, so long as the assumptions remain true.

Valuation methods for both pre-revenue and revenue-generating startups

1. Market and transaction comps: The benchmark approach

Just like real estate prices are influenced by neighborhood sales, startup valuations are anchored by comparable transactions. Similarly, the long-term value of a startup can be benchmarked on public companies with like business models. 

Founders should be acutely aware of two key factors: (i) the closest publicly traded companies and their corresponding financials, and (ii) recent investment and M&A activity within their industry. Public companies, having optimized their financials and margins, provide a solid benchmark. It’s also valuable to understand how external analysts view these companies, with tools like Perplexity being useful for summarizing financial analysts' perspectives. On the other hand, precedent transactions offer a more grounded reflection of the market's actual willingness to invest, as they are based on real-world deals. However, finding private market comps can be challenging, as data is typically limited to what's publicly available. Additionally, this approach may not fully capture the unique potential of businesses in niche markets or those offering novel products.

2. Needs-based valuation: The backward formula

This method is particularly useful for pre-revenue startups. Example: I need $4M in funding and want to sell only 20% of my company. That means my post-money valuation should be $20M. This method is simple for founders and aligns with capital needs. However, a needs-based approach can be completely detached from what the market is willing to pay.

3. Venture capital method: The exit-driven approach

VCs often reverse-engineer valuation based on potential exit value. If they believe you can exit at $500M in five years, and they need a ~10x return on their $10M investment (assume without dilution), they want your valuation today to be around or below $50M. This method is effectively a multiples approach applied to expected future valuation.

Valuations are complex and emotional calculations that often rely on a combination of approaches rather than relying on just one. One founder may receive no investor interest at all while a founder raising on an idea alone can raise large sums at lofty valuations. 

Valuations can be greatly influenced by less scientific factors, like the credentials of the founders, market size, and hype. Nonetheless, orienting your company to perform well in the aforementioned valuation drivers will only improve your chances of a strong valuation and a successful fundraising. 

How multiples and valuations differ by industry

Valuation multiples vary significantly based on industry:

• SaaS: 8-15x ARR (predictable, high-margin revenue)
• Marketplaces: 1-5x Net Revenue (lower margins, transaction-based revenue)
• AI: 10-20x ARR (due to perceived high-growth long-term potential, despite high costs today)

Startup multiple variations by business hold true for public and private companies alike. SaaS companies have significantly higher revenue multiples (EV/Revenue) than marketplaces.

How founders should approach valuation conversations

1. Let the market dictate when possible
Founders often ask: Should I set my valuation or let investors do it? In most cases, letting investors bid is ideal. High competition for your round drives valuation up naturally. In the worst scenario, a founder names their price at a much lower valuation than the investor is willing to pay.

2. When you need to name a number
This is more relevant for convertible notes or when dealing with non-institutional investors. Use one or multiple methods above to justify your number. Avoid setting an unrealistic valuation just because another founder in your network did—it may backfire at the next round.

Valuation isn’t just a number

Your valuation is a strategic decision that impacts your company’s trajectory. The three biggest levers driving valuation are growth, business model, and gross margin. Founders who understand valuation mechanics, market conditions, and investor psychology will always be in a stronger position to negotiate. The best valuations don’t come from magic formulas—they come from growth, market positioning, and competition among investors.