When investing in a startup, one of the most important aspects of negotiation between the investor and the founder is the valuation of the startup. Based on this valuation, the investor’s share in the company will be determined.

Currently, there are numerous methodologies for valuing startups worldwide. For example, some multiply the company’s current annual revenue by ten, others multiply the projected revenue for the next few years by five, some compare it to the value of similar startups, and so on. None of these methodologies is undisputed.

Perhaps the only method of valuing a startup that is considered the most reliable is a valuation based on actual investments.

This means that if, for example, an investor has invested $100,000 in a startup and taken a 10% stake (no matter which methodology was used to assess the startup), then the value of the startup is $1,000,000. Indeed, this method can be considered the most justified of all existing ones because it is backed by real money invested, rather than just theoretical reasoning and calculations. After all, if an investor has invested their own money and taken a certain share after long negotiations and debates with the founder, then such a valuation of the startup can undoubtedly be considered the fairest.

This rule works flawlessly in developed markets, for example, in the United States, where professional players operate, such as old and authoritative companies like Sequoia Capital or Andreessen Horowitz. Their valuation of a startup is considered an axiom for subsequent investors.

But the situation is quite different in developing markets. For example, in Kazakhstan, where the majority of startup investors are non-professional players trying themselves in venture capital for the first time. Many of them do not use any methodologies for valuing startups but rely only on their feelings and impressions of the product or the startup founder. It is impossible to consider such deals as a benchmark, i.e., a reference point for evaluating the startup by subsequent investors.

Therefore, in developing countries, a slight adjustment should be made to the above rule: relying on the valuation of the startup by the previous investor is only possible if it is a professional investor, for example, a specialized investment company or venture fund, angel investor group, or private business angel, who has been in this business professionally for many years. Only their investments and valuations can be trusted.

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