Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

Most founders think valuation is like pricing a house. You add up the assets, factor in the market, apply some multiple, and bam. But that's completely wrong.

Your startup's valuation has almost nothing to do with what your company is "actually worth." There's no spreadsheet that spits out the right number. Instead, valuation is a negotiation between what investors will pay and what you'll accept. It's supply and demand in action.

Let's break down what actually determines your valuation.

The Only Formula That Matters

The truth about startup valuations is they're determined by investor demand for your round versus the amount of equity you're willing to sell.

Say you want to raise $200k. You have five investors ready to write checks totaling $500k. You've got more demand than supply. That means you can safely increase your valuation and still close the round you need.

Flip it around. You want to raise $2M at a $5M valuation, but nobody's biting. Your valuation is effectively zero because there's no demand. You can lower your valuation to find the sweet spot where investors start saying yes. Or you could improve your pitch and keep trying. Or work on the business for six months and earn that $5M valuation through traction.

This is why timing matters so much. 

Pre-Money vs Post-Money: Know the Difference

Two terms you'll hear constantly: pre-money valuation and post-money valuation.

Pre-money is your company's valuation before you take any investment. If you have a $2M pre-money valuation and you're raising $500k, investors know exactly how much equity they need to buy to get their desired stake.

Post-money is simpler. It's your valuation after the investment. Pre-money valuation plus the amount raised equals post-money valuation. So that $2M pre-money company that raises $500k has a $2.5M post-money valuation.

Why does this matter? Because it tells you how much of your company you're selling. If an investor wants 20% at a $2.5M post-money valuation, they'll need to invest $500k. The math is clean.

These valuations typically increase with each funding round. A seed-stage company might raise at a $5M pre-money valuation, then come back 18 months later for Series A at a $10M pre-money valuation. That jump represents the value you've created by acquiring customers, improving your product, and proving your business model works.

When valuations go down between rounds, it's called a down round. That's a red flag signaling something's wrong with the business.

What Actually Influences Your Number

Several factors play into what valuation you can command. Revenue matters. So does your team's experience. Competition in your market. Overall economic conditions. But the biggest factor is still investor demand.

At Hustle Fund, we see this constantly. A founder with solid credentials can raise at higher valuations even pre-product. Meanwhile, a founder without the pedigree might need real traction first. It's not fair, but it's reality.

Think about two companies. One has a founder who previously built and sold a startup. The other has a first-time founder. Both are at the same stage with similar ideas. The experienced founder will likely raise at a higher valuation because investors perceive less risk.

Market size also matters. If you're targeting a massive market with billions in potential revenue, investors get excited about the upside. A smaller market might work for your business, but it caps how much investors will value you.

The Hidden Costs of High Valuations

Something most founders don't realize is raising at a sky-high valuation isn't always good.

First, it affects how much time investors dedicate to you. If someone owns 1% of your company versus 10% of a competitor's company, and both are at the same stage, which one gets more of their attention? The bigger stake wins.

Second, you need time to grow into your valuation. Let's say you raise at a $12M post-money valuation on just an idea. Eight months later, you've built the product and gotten some users, but not the explosive traction you expected. Now you're out of money and need to raise again.

Investors look at your progress and think: "You haven't grown enough to justify increasing the valuation." They might want to invest at a lower valuation. But a down round signals problems. New investors see the lower valuation and wonder what went wrong. It becomes way harder to close the round.

This happens more often than you'd think. Founders get excited about high valuations without considering whether they can deliver the growth to support them.

Market Conditions Change Everything

Right now, in late 2025, fundraising is tougher than it was three years ago. VCs have less capital to deploy. Interest rates are higher, so their LPs can park money in safer assets instead of venture funds.

This means fewer investors chasing deals. More competition among founders for capital. Lower valuations compared to the boom years.

Companies that raised at relatively high valuations in their last round struggle to show enough progress to justify a step-up. Some raise flat rounds. Some raise down rounds. It's brutal.

The thing is there's still capital flowing. It's not 2008. Good companies with real traction can still raise. You just need to be realistic about what valuation the market will support.

How to Approach Your Valuation

Start by researching comparable companies. What valuations did similar startups at your stage raise at? Look at recent rounds in your industry. Talk to other founders. Get a sense of the range.

Then consider your leverage. How much investor interest do you have? If you're in high demand, you can push higher. If you're struggling to get meetings, you might need to be more flexible.

But, remember the goal isn't to maximize your valuation at all costs. The goal is to raise the capital you need to hit your milestones, from investors who will actually help you, at terms that work for everyone.

A slightly lower valuation with the right lead investor beats a higher valuation with an investor who won't add value or worse, creates problems down the line.

The Real Math

At the end of the day, valuation is about the math of equity dilution. You're selling pieces of your company to fund growth. The question is how much are you selling, and what are you getting in return?

If you raise $500k at a $2M pre-money valuation, you're selling 20% of your company. If you raise the same $500k at a $4M pre-money valuation, you're selling 11%. That difference compounds over time as you raise more rounds.

But focus on the wrong thing and you'll optimize for ownership percentage while your company fails. Better to own 40% of a successful $100M company than 80% of a failed one.

Valuation is one piece of the puzzle. Get it right, but don't obsess over it. Focus on building something investors want to fund. The valuation will follow.

If you're ready to dive into angel investing or want to learn more about startup valuations from experienced investors, check out Angel Squad for community support, deal flow, and insights from people who've been through it all.