Runway Incubator | The Innovation Blog

How to Price Your Startup

Posted by Joe Vasquez on May 23, 2016 4:31:14 PM

Someone asked me last week about the basis for pricing venture deals. It’s surprising how much I hear this question. Since it’s so fundamental to the equation of venture investing, perhaps it’s surprising how much it doesn’t come up more often.

Whenever someone asks me about pricing, it reminds me of how we selected our courses in business school. At Wharton, we bid on all of our courses, not using money (which would have made things much more interesting) but with another artificially limited resource - points. We started business school with 3,000 points that we could use to bid on any courses that we wanted. The format was a reverse dutch auction. There were a limited number of spots for each course, and we expressed our desire to take the course by bidding a certain number of points to take it. Some of the more popular courses went for as high as 10,000 points. Clearly there was a way to make more points, which is why those amounts were so high, but that’s another story. The amount that each of us ended up paying in points was the last bid amount that didn’t clear. So, if there were 30 seats in a class, whatever the 31st highest bid was, that was the amount that everyone paid for the course, no matter what they bid.

Why do I bring this up? Because it always serves to remind me of the most important lesson in business - that something is worth what someone is willing to pay for it, nothing more, nothing less. No, don’t try to think your way out of that statement - just let it sink in. That shirt you’re wearing has no set price. The computer or phone you’re using has no set price. Yes, it has an asking price but that’s just one side of the equation. If no one pays that price, then that asking price is meaningless. I can say my shoes are worth a million dollars, but unless someone pays a million dollars, I’m just saying crazy things.

So how does this relate back to pricing your startup? Well, if you’re looking for a valuation, you’re going to have to take a deep breath and realize that to a large extent you’re just going to have to make it up. Sure, there are comps you could do to similar stage companies, extrapolations from your last funding round, and my favorite, a discounted cash flow projection. And you definitely should do some of these. Having projections helps support an asking price, as do comps. But at the end of the day, the final price ends up being a function of how many people are interested in buying a piece of your company and how much each of them is willing to pay.

When you think of it this way, you realize that there’s a lot more affecting the valuation of your company than just your discounted cash flow statement. Who you’re talking to affects the price. The way you describe your company affects the price. The number of people genuinely interested in affects the price. The good thing is that unlike your product, you can change all of this today without doing another build.

Joe Vasquez

Written by Joe Vasquez

Joe has a passion for helping entrepreneurs and corporations to innovate. He was an early co-founder of StartX, an accelerator for Stanford entrepreneurs. Prior to joining Runway, Joe taught at the Kauffman Fellows Academy and was a Data Analyst Fellow at LocoMotive Labs. Joe started his career in investment banking at Goldman Sachs and spent two years teaching bilingual math with Teach For America. Joe holds a BS in Atmosphere & Energy Engineering from Stanford University.

Topics: Business, Deal