The truth about valuation: why a higher number isn't always better
A startup valuation is not a trophy you put on a shelf; it is a contract you have to live with for the next 7 years. Many founders in Aberdeen and beyond think a bigger number today means more success, but that logic often breaks down when the next funding round arrives.
The danger of the valuation hangover
In our office on Queens Road, we reviewed 43 pitch decks over the last 6 months. A common thread among 29 of those decks was an inflated valuation that did not match the current revenue. When you set a price that is too high during your seed round, you create a massive hurdle for your Series A. If your company value does not grow as fast as that initial number suggests, you end up in a 'down round'. This happened to a local software firm we advised in late 2023. They raised at a £12 million valuation but only managed £400k in annual recurring revenue. When they needed more cash 14 months later, investors would only offer a £7 million valuation.
This 41% drop in value forced the founders to give up an extra 12.5% of their equity just to stay afloat. They lost control of their board and had to lay off 4 staff members in the marketing team. It is a painful lesson that we see repeated far too often. A high number might look good in a LinkedIn post, but it creates a debt of expectation that most startups struggle to pay back. We suggest looking at your valuation as a ladder. If the first rung is too high, you might not be able to reach the second one when your runway starts to look short in 11 months.
A high valuation today is a debt of expectation you must pay back with massive growth tomorrow.
How investors actually look at your spreadsheets
Most VCs and angel investors use a mix of three methods to judge what your tech startup is worth. They look at your discounted cash flow, but they also look at 'comparables'—what other companies in your niche sold for recently. If a similar SaaS company in Edinburgh sold for 6 times their revenue, an investor is unlikely to give you 15 times your revenue without a very specific reason. We recently helped a founder adjust their ask from £8 million to £5.2 million after looking at 14 similar deals in the UK tech sector from Q3 2024. This change actually led to 3 term sheets being signed within 19 days because the price finally made sense to the market.
Investors also look at your 'burn rate' versus your growth. If you are spending £45,000 a month to acquire £5,000 in new monthly revenue, a high valuation will scare off serious partners. They want to see that every £1 they invest will turn into at least £3.50 of value within 24 months. At Onbelai, we use a 12-point checklist to audit your financial model before you ever send it to a fund. This includes checking your customer acquisition cost (CAC) and your lifetime value (LTV) ratios. If these numbers don't align with your valuation, the deal will likely fall apart during the 3-week due diligence process.
Liquidation preferences and the fine print
Sometimes an investor will agree to your high valuation, but they will hide 'protective' terms in the fine print. The most common one is a 2x or 3x liquidation preference. This means if you sell the company, the investor gets double or triple their money back before you get a single penny. We saw this in a deal memo for a clean-tech startup in May 2024. The founder was happy with a £10 million valuation, but the 2x preference meant that if the company sold for £6 million later, the founder would walk away with zero. The investor would take the entire £6 million.
You are often better off taking a lower valuation—say £7.5 million—with a standard 1x liquidation preference. This protects your hard-earned equity. We tell our clients that a 'clean' term sheet is almost always better than a 'high' term sheet. It keeps the cap table simple and makes it much easier to attract talent later on. When you offer options to your first 10 employees, those options need to actually be worth something. If the liquidation preferences are too heavy, those employee shares are basically worthless paper. We recommend having a legal expert or a financial partner look at the 'waterfall' of your exit before you sign anything.
A 'clean' term sheet at a lower price is better than a 'dirty' term sheet at a high price.
Building a valuation that lasts 8 years
Your goal should be to reach an exit or profitability within 8 to 10 years. To get there, you will likely need 3 or 4 rounds of funding. If you start with a fair valuation of £3.2 million today, you have plenty of room to grow to £10 million in two years and £40 million five years from now. This steady upward trend is what secondary investors love to see. It shows your company is predictable and stable. In 2022, we worked with an Aberdeen-based subsea tech firm that took this conservative approach. They raised £1.2 million at a £4.45 million valuation. By 2024, their revenue had tripled, and they raised their next round at £14.8 million with zero friction.
To build this kind of valuation, you need to document everything. Keep your receipts, track your sales cycles, and know your churn rate down to the decimal point. If your churn is 3.4%, don't round it down to 3%. Precision builds trust with investors. We provide our clients with a standard reporting template that they can use to update their investors every 30 days. This transparency makes the next valuation conversation much easier because there are no surprises. Honest numbers lead to honest valuations, which lead to a much lower stress level for you as a founder. Plain English finance isn't just about the math; it's about the peace of mind.
Next steps for your investment prep
Before you head into your next pitch meeting, take a hard look at your 'pre-money' valuation. Ask yourself if you can realistically double that number in the next 18 months. If the answer is 'maybe' or 'no', you need to revise your strategy. Onbelai helps founders in this exact position. We don't just give you a number; we build the model that justifies that number to a cynical VC. We have 9 active clients right now who are preparing for Q1 2025 raises, and each one has a valuation backed by 15 pages of data-driven evidence.
Don't let ego drive your funding round. A startup is a marathon, not a sprint, and a valuation that is too heavy will only slow you down. By the way, if you aren't sure how your current numbers stack up against the UK average, we have a simple spreadsheet that can help. We can run your current revenue and growth rates through our internal database of 156 previous tech deals to see where you sit. It takes about 2 hours of work on our end, but it can save you 6 months of wasted time pitching at the wrong price point.
