Understanding Early-Stage Valuation

Early-stage valuations in venture capital are rarely straightforward. While there is a temptation to standardise valuations—for example, pre-seed rounds raising $500k at a $5M post-money valuation—this approach can lack the nuance required as no two startups are the same.

Unlike established asset classes, valuing a startup at the zero-to-one stage involves less objective assessment and more strategic positioning. However, once capital is received, expectations on multiples ensue, and logic takes over quickly.

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Scarcity and Round Demand Dynamics

Scarcity plays a pivotal role in early-stage investments. However, it’s important not to over-index on it. When a startup shows promise, limits its fundraising round, and founders tell a compelling story with strong networks, investor competition can drive up the valuation.

In such cases, valuation is not purely based on financial metrics but on what the market is willing to pay for access to a potentially high-growth opportunity. While this can enable founders to raise significant capital with healthy dilution, it also carries risks. Overly aggressive valuations can create unrealistic expectations for future funding rounds, making it difficult to sustain growth or attract follow-on investment.

A prime example is WeWork. Once valued at $47 billion, its valuation was driven by hype and aggressive growth projections rather than financial fundamentals. When scrutiny exposed governance flaws and financial instability, its valuation collapsed, leading to layoffs and investor losses. Similarly, many startups in the on-demand and direct-to-consumer sectors have struggled after raising capital at inflated valuations, forcing them into down rounds, restructuring, or closure.

Founders and investors must balance ambition with realism, ensuring valuations align with growth potential and fundamentals.

A high valuation isn’t inherently good or bad—it depends on strategic goals, funding needs, and investor alignment. At the early stages, it helps not to think of a valuation as what your company’s worth, as it is too early to tell. Inflated valuations may create difficulties in future rounds, while conservative valuations can offer benefits like easier follow-on funding and long-term stability.

A focus on dilution, investor value-add, and return on capital received (value beyond money) is a balanced way to evaluate things.

Emerging Market Considerations: The Role of FX Risk and Global Political Influence

For startups in emerging markets, foreign exchange (FX) risk is a critical factor and this is both on exchange rate volatility, and liquidity. Many valuations are denominated in USD, GBP, or EUR, but the companies operate in local currency and as they grow, revenue fluctuations driven by FX volatility can impact long-term stability. FX volatility is influenced by macroeconomic factors such as U.S. tariffs, global trade tensions, and monetary policy shifts, inflation creating uncertainty even for companies earning in "hard currencies."

One key consideration in valuation dynamics is the reliance on globally understood currencies. However, for those operating in emerging markets, FX risk must be prioritised. Managing and hedging this risk is essential for financial stability.

Founders must balance entry valuations with revenue diversification, revenue dependence on a single market, and diversification across hard and soft currencies. Investors also need to factor in FX exposure, volatility, and liquidity when determining entry prices and long-term strategy.

Founder’s Background and Team Competency

Investors weigh the experience and expertise of the founding team heavily. A strong track record, deep industry knowledge, and execution ability can justify higher valuations, sometimes even outweighing traction or revenue at early stages.

The idea is that a more experienced team means that it is somewhat de-risked, at least as de-risked as it can be. Either via the team’s ability to execute to get initial signs of market pull, or also fundraise — to buy time to find initial signs of market pull. Also more experienced teams garner favour because of the logical assumption that their experience is likely to give them an edge to bringing on board high quality talent.

Industry Bias, Human Bias, and Market Trends

The sector in which a startup operates significantly influences investor interest. Industries like AI, and Fintech often attract higher valuations due to perceived growth potential, while those facing regulatory or economic challenges may see more conservative valuations. For example, consumer startups for a long time were favoured, but ran out of favour because of perceived capital inefficiency - it just costs more to acquire customers in enough volume to unlock advertisement or non subscription based revenue, and customers more and more love free stuff.

Beyond industry bias, human bias—such as gender and racial bias—also impacts valuations. It’s unfortunate but it’s true. Investors are human and bring to their work a baggage of pre-conceived assumptions, some they may not even be conscious about, this coupled with capitalistic ideals, often means investors are trying to get in as low as they can, and sell as high as they can.

Studies show that underrepresented founders often receive lower valuations despite comparable or superior performance. This reinforces the subjectivity of this stage.

Additionally, business model bias leads investors to favour companies that mirror past successes rather than alternative, innovative or market creation models. Does the B2B software rave sound familiar?

This can also be dangerous. Say you find yourself in an industry with an industry tailwind driving valuations up, it is not always sensible to accept the highest valuation. Many startups raised in the early days of the conversational AI hype, now with Deepseek’s revealing that they could build these models for 2% ($6m for Deepseek v $350m for ChatGPT) this can make things tough for founders.

Investor’s Fund Model and Expectations

Valuations are also shaped by investor fund models. Institutional investors, angel investors, and corporate VCs have different return expectations and risk appetites.

Founders should assess not only valuation offers but also the strategic value an investor brings, such as operational expertise, network access, and follow-on funding potential (beware of signalling risk — the risk that if investors don’t invest after their first investors, other investors won’t want to invest)

It helps to understand the investors perspective and remember that some investors more than others are price sensitive, because of their fund thesis, portfolio construction and expected multiple returns.

The OpenSeed VC Perspective

At OpenSeed VC, we invest in founders at the zero-to-one stage—the earliest and riskiest phase of a startup’s journey with the potential for the highest impact, and return.

Our operator network of over 60 software engineers, product managers, and domain experts provides strategic advantages beyond funding. We believe in smart capital, a relevant network to offer support and guidance during the most volatile stages of company-building. Day zero.

Empathy as a Strength

Empathy is often undervalued in early-stage investing. Contrary to misconceptions, being empathetic does not mean being dishonest. It means offering direct, honest, and constructive support and understanding the realities of startup challenges allows investors to provide mission-aligned guidance rather than transactional interactions.

It is a human business after all. As early stage investors, we are investing in people.

Empathy is sometimes seen as a weakness, but that is false. You can be kind and direct, kind and honest. Empathy does not mean coddling or avoiding difficult truths—it means being a genuine, supportive partner who understands the nuances and difficulties of early-stage entrepreneurship.

Investors who take an empathetic yet candid approach build stronger, more productive relationships with founders.

Final Thoughts

Early-stage valuations are complex and influenced by multiple factors beyond financials. Founders must consider FX risks, market positioning, biases, and investor alignment when determining valuations. The right investor brings more than capital—they provide strategic support, empathy, and mission alignment that can be crucial for success.

By considering these elements, you can make informed decisions and secure funding on terms that support their sustainable growth and long-term success for you, your startup, and your investors.

Thanks

Maria