This week, we were joined by Raise Ventures Investor, Jenny Ervine to discuss two numbers behind a fundraise that all startups struggle with - pricing and valuation.
Here are 10 questions to ask yourself before you set you price structure and valuation, and some tips for how to deal with both,
1) Does your pricing make sense for your business model?
It sounds obvious, but your pricing needs to be sustainable for your business model. £10 a month sounds affordable to the customer, and might seem like an easy sell when you’re looking for that all important early engagement, but if it takes you 3-4 months to close a customer, and they only stay for a month or two, chances are this is not a profitable model for your company long term. Think about the unit economics when deciding on pricing, bear in mind LTV and CAC, and price accordingly.
2) Are you validating your pricing?
It’s fine if you don’t know what price to charge yet, that’s all part of the product market fit validation you expect when building your business case for investment. If you have customers, don’t be afraid to ask them, and if you don’t, survey potential customers to understand the exact value they’ll get, and what they’d pay for it. Make sure price questions are open ended, so you don’t put words in their mouths, and really listen when they’re talking about value, so you can prioritise features they’ll pay for.
3) What pricing structure are you considering?
Commission, revenue share, subscriptions, one-off purchases, flat rate, tiered system, etc. Explore different options and don’t pre-determine which is best for you. Each option requires a different go-to market strategy, so be selective but get creative. Again with point 2, validate some of the different options that work for your business with your customers.
4) B2B SaaS product? Be agile.
It’s really difficult pricing a B2B Saas product, especially when you have no visibility on what your competition is charging. Be empathetic to your customer, and see the pricing through their eyes. What are their alternatives? What are their motivations? If you succeed, how do they succeed? You might be selling to them so they can sell internally. We like value-based pricing, and the more you know about your customer, the easier that will be. If you’re needing to validate a price based on time or unit or headcount, be flexible and don’t go into too much specific detail. If their turnover is high and you’re pricing on headcount, they’ll see it as a headache to keep on top of. Try organising into bands so they know what to expect.
5) Does your free pilot make sense?
Lots of startups get asked to run pilots, either for small companies or large enterprises, to prove their value. The reaction, especially for the big players, is to do whatever the potential customer wants to win them over. It’s worth remembering that although it’s an exciting opportunity, the time commitment involved stops you (even just temporarily) from doing other work. If the pilot does not work out, you don’t want to feel like you’ve wasted your time and resources. The best place to start is to set clear KPIs and achievable deliverables, against time commitments, with a price attached to success metrics agreed on both sides. For a bit of backup, remember to stay on track with your pilot, and only agree to deliver something if it aligns with the core value proposition of your business. Think: if this pilot doesn’t work out, can I use the work I’ve done on other pilots or new clients? The more you start doing highly tailored work without cost for specific clients, the more at risk you are that it could be a waste of time and resources.
6) Are you tracking how your customers find you?
When thinking about price, you could be in a situation where you’re paying affiliates / brokers etc for visibility, which you’re trying to work into your pricing model. If this is the case, make sure you measure how your customers find you so you can make the best decision. For example, if you’re wary of the Apple Store’s 30% fee charged on in-app purchases, track what % of customers come from the iPhone vs. desktop. If over 6 months, you see that 80% of customers come from the app, you know that’s a valuable stream and you either need to put more into online advertising or feel comfortable paying that rate, given the income it is generating.
7) How do I get it right?
With investors, it’s just the same as with customers, you need to have empathy, understand their motivations, and ultimately it’s down to price. It seems obvious, but it’s worth remembering that an investor's job is to make a return on an investment, especially if you’re pitching to a partner at a VC fund. Your pitch is that you are going to give them a great price for something that is potentially very valuable in the future. The more attractive the price (in this case, valuation), the easier their job is. If you’re working on the narrative, think about how the investor will need to sell your business internally, and make the case as easy as you can for them. Do your research and justify valuation for them.
8) I don’t even know how much I should be valuing my company, what do I do?
You can try and reverse engineer the numbers. If you feel a bit lost, answer these two questions
How much money do I need right now, to build what I need to get to the next stage?
How much equity am I prepared to give away at this stage? (This will depend on multiple things, how much equity you have right now, whether / how many times you plan to raise in the future, etc)
For ease, let’s say you need £250k and you’re prepared to give away 10% of your company for that £250k, that means you’re keeping the remaining 90% of your company which becomes equivalent to £2.25m. Add the two together and that makes your valuation £2.5m post money.
9) How much equity should I be giving away?
Typically each round, you should expect to give away roughly 15% of equity. This is with the expectation that you’ll raise again in future, potentially twice more, and give away another 15% each time. Stay within those limits and after three raises you still have 55% of the business.
10) Am I valuing myself too high?
Valuation is important, and it can be the difference between an investor taking you seriously or not. Your valuation needs to be justified, and many things play into this but if you’re looking to get some comparables, Crunchbase is your friend. You can look for your competitors or others in your industry and mirror their raise history. Want some ball parks? This piece in SeedLegals is very handy, which suggests prototype - launch you’re looking at valuations between £300k-£1m, traction £1-2m, and revenue £3m+.