Valuation of seed stage startups

I don’t care that much about valuation, and thus pay slight attention to this parameter when deciding whether to invest or not in a startup. Apparently, I am not the only one. In a recent post, Sam Altman, of YC fame, provided his recipe for successful investment in startups, which doesn’t mention valuation at all.

Hunting for a diamond

Similarly to what Fred Wilson stated in his post “Venture Fund Economics: When One Deal Returns The Fund“, I don’t try to “swing for the fences“, I just try to create a reasonably well-diversified portfolio that corresponds to my values and interests.

Some will read this and suggest that our business is all about swinging for the fences. But I don’t think so. There are hitters in baseball, the best hitters in fact, that hit balls out of the park when they are just trying to make good contact. That’s how you have to do it in the venture business. You try to make 20 great investments and you work with them closely in hopes that four years in you have six or seven that have home run potential, and after ten years, you maybe hit one or two out of the park. If you try to hit every one out of the park day one, you’ll strike out way too much and the fund won’t work out very well. – Fred Wilson

Swinging for the fences would require being in the 1% of the angel investment community, and being capable of identifying entrepreneurs that are also in the 1% of their industry. It implies being capable of making extensive use of second-order thinking. Without contradicting the above, Altman’s guidance for “thinking big” additionally applies:

You should try to limit yourself to opportunities that could be $10 billion companies if they work

From hypothetical to real value

Investing in seed rounds is going from hypothetical value to real value.

In seed investments don’t focus too much on hard metrics but rather on more intangible factors such as the grit of the founder, size of the future market, optionality (did anybody say pivot?) and potential systemic leadership of the startup that you are considering funding.

In my view, most financial analysis is backward-looking, and the discounted cash flow analysis performed at the due diligence stage is only based on the founder’s promises/narrative. With these tools, how are we supposed to appraise the potential income or impact of a startup?

This said I am one of those that firmly believe that you should hold founders accountable for their projections vs. real achievements. Once you have agreed to the goals self-imposed by founders, do hold them accountable for the gap between expectations and reality, and let them explain how they will overcome any obstacles that they didn’t initially anticipate. You should challenge the action plan if it is not bold enough or clearly pointing in the path to failure, in all other cases I normally stay put until the next investor update.

Another way to look for value

Asking hard questions in addition to those that I included in doing due diligence as per my investment criteria

  • Are you meeting your financial targets?
  • What’s your path to profitability?
  • How much fundraising is required to get there?
  • How much will investors get diluted?
  • What’s your burn?
  • How much runway is left?
  • What are the anti-dilution rights?
  • What is the liquidation preference of the money already raised?


Valuations measure the trade off between current prices and a very long-term stream of expected future cash flows. Every useful valuation ratio is just shorthand for that calculation. Every valuation ratio that fails that criterion is inferior, and you can show it in historical data.

John P. Hussman, Ph.D.
President, Hussman Investment Trust

Investor Updates

I really get upset when weeks go on and I don’t get any news from some of the startups in which I have invested. In the case of publicly-traded stocks, I can find out the market cap almost every minute, get quarterly reports and follow discussions with the management for those companies that hold investors’ calls.

When it gets to startups, a few of them provide regular updates. Some founders only get back to you when they are running out of money or even worse, when the major crisis or bankruptcy is looming or irreversible. Why??? – What benefit do you get from keeping your shareholders and investors in the dark? Even if you are not making much progress, they will eventually find out.

I understand that reporting takes time and that the founders’ priority is growth, but by neglecting to communicate regularly with your investors, paradoxically you may be missing some opportunities to accelerate growth.

What I (and probably all investors ) want from you:

  • No bullshit communication, straight and to the point.
  • Provide a few KPIs – Trends – Goals – Highlights and Low-lights. Asks.
  • Do it every month, on a rigid schedule.

Information rights are not very frequently considered in pre-Series A shareholders agreements since there is a scarce chance to enforce them, nevertheless, I am considering starting to insist on their inclusion as a condition for investment, at least as a system for the self-identification of the “bad apples”.


Effective communication is 20% what you know and 80% how you feel about what you know.

Jim Rohn

Fundraising – Angel Investor Perspective

The purpose of this post is not to patronize you on how to fund-raise. There are plenty of places all over the internet where you can learn that.

My goal is to encourage you to reflect on your startup’s future cap table and more particularly on how you will take advantage of your potential investor base beyond money, i.e. what will be their added value?.

As one social entrepreneur that raised over $10 million in funding for her social enterprise said ‘”… find people who don’t just write checks. Instead, find people who can actually help the business grow“.

Concentrated number of shareholders

You may think that potential investors, particularly those that may come on board in future larger rounds such as VCs and corporate investors, would like to find as part of their due diligence, a cap table with a concentrated number of shareholders. This may be true but is not necessarily rational. As long as they have their investment protections in terms of voting and control of the company well protected, there is no reason to reject an atomized shareholder base, specifically if they do not vote or act as a class.

Also, you may not want to burden yourself with the multiplication of administrative tasks associated with having a larger number of shareholders. As a founder recently told me “We’re trying to be light on the number of investors to reduce admin and O/H expenses when managing the cap table and investors“. But is a minimal number of investors and mitigation of operational expenses really the best way to add value for a startup looking to raise seed capital?.

Furthermore, the investor’s expectations must indeed be managed. You need smart money that can help you grow the business. You may think that if you have too many investors, then you will be constantly distracted from managing the business, but is this necessarily so?.

Managing a startup with a large number of shareholders

Why don’t you automate your fundraising process starting with the standardization of your pitch (deck, video, terms sheet)?. I know that at later stages you are strongly advised to personalize your pitch to the recipient, but at this point, you should be comfortable having a standard presentation that caters to most of your potential investors.

There are multiple ways to get your startup funded. Do you prefer to have a few angel investors in your cap table or should you consider crowdfunding or other collective fundraising methods?.

Have you tried Carta, Captable.io or Assure  for the administration of the fundraising process?. I know this might currently seem like a non-productive expense for your startup, but who told you that your investors are not willing to pay for these costs?.

Communication with your shareholders could also be, up to a certain point, automated. Some of the startups in my impact investment portfolio do a great work in this area, e.g. Genuine Impact – has weekly communication via a newsletter and has even implemented an open innovation process.

One Ring to rule them all, One Ring to find them, One Ring to bring them all, and in the darkness bind them

JRR Tolkien

Open PAYGO – the future of inter-operable off-grid appliances

Interview with Thibault Lesueur – Co Founder & CMO Solaris Offgrid – Solaris Tanzania (*)

What constraints are preventing the inter-operable off-grid appliances market from ramping up? and what could be done to overcome them?

The number one issue is plugging. There are different plugs and plugging systems, as they are ultimately defined by the manufacturers of solar systems. This limits expansions and constrains users to remain captive within the proprietary systems developed by such manufacturers.

At Solaris Offgrid we promote the adoption of a “neutral” plugging protocol. We are currently developing one mandated by the organisation Efficiency 4 Access (and being financed by UKAID) to develop an opensource one in order to facilitate collaboration across the industry players. This open source protocol is already in its testing phase. We believe that inter-operability breeds efficiency and enlarges the freedom of choice for the final user, which in addition will result in easier access to finance.

Having a standard plugging protocol will allow manufacturers to sell more accessories to a larger group of users, possibly there will be more competition but at the same time, this will foster the creation of more plugging products.


How does Solaris Offgrid envision to address the Productive Use Leveraging Solar Energy market?

The Open Paygo Token makes vertical markets accessible for the end-user, i.e. promotes and helps their financing. Markets such as water, mobility, sanitation, med tech, etc. targeted at BOP users will become accessible through the adoption of Pay As You Go (PAYGO) payment mechanisms. We promote the adoption of an open-source PAYGO mechanism as a form to broaden financing, enable the owners of data to share it widely and improve the tracking of users’ credit history across different products. This is really about providing value to the end-user and enabling impact beyond the use of solar energy, without detriment to the privacy and confidentiality of the information. We have developed a payment protocol that meets EU GDRP standards and that will enable end-users to add value to their credit records, should they decide to share them.


Will preventive analytics help reduce PAYG credit risk?

When we discuss machine learning, there is always this debate between the need for a lot of data vs. useful data. We have to keep in mind that the end-users of the PAYGO solutions mostly live in informal economies. They have no credit history, thus there is no proof about the usefulness, veracity or accuracy of any information that they voluntarily contribute. The principle of ‘garbage-in / garbage-out‘ clearly applies to these situations.

Predictive credit models are being designed by several solar PAYGO operators, including Solaris Offgrid. We are interested in providing value for the end-user through the data that we collect, beyond up-selling. We look to create a virtuous cycle, such as the one that BrightLife and Baobab+ bring to their users while combining PAYGO with micro-financing, or being able to offer them additional freebies such as insurance, similarly to what PEG Africa does.

Even though the most reliable data comes from telemetry, i.e. from tracking use, and despite the widespread belief that ‘data is the new oil‘, we acknowledge the limits and constraints imposed by the context in which we operate. We do not want to impose any costs on the end-users since they already go to great strides to afford the electricity. We thus promote software solutions that favor the sharing of data and the spreading of costs among multiple providers.

Today we have implemented automated payment reminders, and we can accurately predict who will pay and who will fail. What we are trying to do now goes beyond early action, we are trying to compile customer identity patterns that will let us anticipate who will be a good client based on weak signals such as his/her profession, location, consumption patterns, etc.


Today every product is speaking its own language in the paygo world, making their adoption harder. With OpenPaygo Token we have created the Esperanto of paygo, under an open source methodology

Thibault Lesueur – Co Founder & CMO Solaris Offgrid


(*) I am an investor in Solaris Offgrid

From Impact First to 100% impact portfolio

Why don’t you have a 100% impact portfolio in which all your asset classes are deployed in impact investments?

When I started investing I didn’t care a lot whether my investments had any positive impact or not; this was just an afterthought held somewhere in the back of my mind. I just was squarely driven by greed and mainly focused on identifying promising startups with engaged founders, a large addressable market, good product-market fit and the possibility to scale quickly.

My initial plan was to put some chips in startups raising funds at seed-stage and to eventually double down on the most promising follow-up rounds. I had no explicit financial returns requirements, but based on public information that I had gathered about angel investment return averages, I expected that on aggregate my investments could be returned at least 2-3x within 7-10 years.

As possibly many other impact investors, I didn’t discard per se the idea of supporting impact-oriented startups or social enterprises, it was just that I didn’t want to impose on myself any unnecessary constraints since that would likely result in additional time devoted to research.

Another reason – once again acknowledging that I practically didn’t make any efforts to identify any worthy impact investment opportunities – was that most of the startups that I initially interviewed were:

  • trying to solve a problem that didn’t connect with any transcendental human problem, nevertheless offered a good risk/return opportunity (Weezic, Nudge, Fidzup, etc.); or
  • addressing valuable socio-environmental challenges but spooking investors by announcing projected return targets less enticing than the vast majority of other non-impact-oriented startups.

At a certain point, probably associated with my mid-life crisis, I realized that my money could have a lot “more bang for the buck” if it went into impact investments. I was inspired by the idea promoted by Toniic T100 of deploying 100% of my investments – across all asset classes – in alignment with my social priorities, in pursuit of a deeper positive net impact and using the whole spectrum of my capital to do so.

We normally are embarking on a long journey when trying to change our minds about anything including why and how we invest. Personally, having a 100% impact portfolio is still work in progress(*) rather than a ticked off goal. Nevertheless, I now have a simple rule for any new seed investments which is also quite a high hurdle: it has to be impact-focused.


When you get to 100%, that’s when the real journey starts

Toni Johnson formerly at Heron Foundation

(*) This is the impact section of my current startup portfolio.

How to become an angel investor? the basics

Naval Ravikant and Babak Nivi, the founders of Angelist, have started a new podcast and a blog, on startup topics.

In their first post, they mentioned that:

There are resources we can point you to for the cold start. Paul Graham wrote a piece called “How to be an Angel Investor.” There’s “How to be an Angel Investor, Part 2” on Venture Hacks. There’s a course called Future Investor. You can look at all of those for the basics.

I am more of a “learning by doing” type. Even though I am a lawyer and studied business and finance in grad school, I started learning about seed investing by joining a group of angel investors, initially investing small sums along with them, until I was confident enough to identify, research, perform the valuation and negotiate seed investments on my own.

Joining a syndicate in Angelist is one of the easiest and initially least expensive ways to start investing in startups. There are many equity-based crowdfunding platforms oriented to impact investments in Europe. Some of my favorites, since they are more impact investing focused, are:


Over-prepare, choose carefully and invest confidently

NickMoran from New Stack Ventures

(*) I’m an investor.

Exactly what is social impact?

Social enterprise is the use of business to solve social problems.

The companies in my impact portfolio provide some clear examples:

  • Solaris Offgrid is in the business of selling solar home systems in Tanzania to provide access to energy to isolated villages and also supplies the software enabling kitchen stoves to become Pay as you Go (PAYG) systems, replacing polluting and more expensive fuel alternatives.

In sum, social enterprise takes a broken ecosystem, often where money is already inefficiently exchanging hands, and tries to make it better—with the ultimate goal of improving the life of the target population in a financially sustainable way.

Reversing the approach to the definition given above, you get “conscious capitalism“. Conscious capitalism is a way of thinking about capitalism and business that better reflects where we are in the human journey, the state of our world today, and the innate potential of business to make a positive impact on the world. The two key factors are purpose, and stakeholder orientation. The interaction between these factors results in conscious leadership and a conscious culture.

I wonder if we may soon see any social enterprise IPO?.


Purpose is not the sole pursuit of profits, but the animating force for achieving them

Larry Fink,CEO of BlackRock

Portftolio approach

This is my current impact investment portfolio.

I have invested several times in some of these companies, at different stages of their life cycle. 

Similarly to any other risk allocation decision, I try to hedge against company-specific risks (i.e. non Beta) by diversifying, which may bring my returns closer to market returns, nevertheless, I am happy forego potential upside in exchange for avoiding excessive concentration of my risk while missing on some opportunities, i.e. abandoning the chance to play the soothsayer.

When it comes down to deciding on the right ticket size, I operate based on the following allocation criteria:

  • Are the results there? Why is this time different? How has the startup performed since the last round?. Can it scale up? If it is not growing, I would most likely pass – founders are generally great story tellers.
  • What would I need to invest to keep my pro-rata? The current number of shares in proportion to the issued shares and voting rights.
  • Risks – Do I have an edge? (informational; analytical or behavioral).
  • Valuation

Other allocation rules that I follow:

  • I try to limit my overall allocation to startups, i.e. including follow up rounds, to less than 10% of my net worth.
  • The aggregate initial investment in startups is limited to 5% of my net worth.
  • For the first time in investment in any startup, not more than 1% of my net worth – this is kind of the Jason Calacanis‘ approach, if you have 50k to invest, do 30 x 1k investments and keep 20k for follow up in 2-3 of the better performing startups.
  • Ensure that I already have or know that I will have within less than six months of the date of investment, at least the same amount that I would invest, for follow up rounds.


We’re going to try to trim our weeds and water our flowers. Most of all, we’re not going to think too much about our weeds. We’re going to be watering our flowers.

David Gardner

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