Realistic Valuations for Investors and Founders: Balancing Art and Science

For early-stage founders, figuring out the right valuation for your startup is one of the trickiest parts of fundraising. Valuation is rarely a perfect science—it’s influenced by market trends, investor competition, founder storytelling, and the fundamental strength of the business.

At our State of Pre-Seed & Seed VC panel, investors shared how they think about balancing deal dynamics with intrinsic company value—especially in hot sectors like AI, where valuations can become inflated.

So, how should founders approach valuation? And how do you avoid pricing yourself out of the market or leaving money on the table? Let’s dive in.

1. Valuation is More About Market Dynamics Than Company Metrics

One of the biggest misconceptions among early-stage founders is that valuation is based purely on traction, revenue, or product strength. While these factors matter, investor behavior plays an even bigger role—especially at pre-seed and seed.

📌 According to our 2024 State of the Market report:

✅ In non-competitive rounds, investors price startups based on their check size and ownership targets—often independent of company performance.
✅ In highly competitive rounds with strong founders, valuations get pushed higher as investors compete to secure allocation with minimal dilution for the company.
✅ Valuation conversations are fluid—founders should stay flexible and understand that the number is often dictated by investor appetite rather than intrinsic company value.

💡 Takeaway: Your valuation isn’t just about your company—it’s about the dynamics of your round. If you have multiple investors competing, your valuation will be much higher than if you’re negotiating with just one or two parties.

2. Balancing Market Trends with Startup Fundamentals

Early-stage valuations, particularly in hot sectors like AI, fintech, and climate tech, often become inflated due to investor excitement. However, not all high valuations are sustainable.

📌 Kelly Mak (Principal at Workbench) explained his firm’s pricing strategy:

💡 “In hot sectors like AI, inflated valuations are common, but that doesn’t necessarily reflect the company’s long-term potential.”

What Drives Early-Stage Valuations?

✔ Team Strength – Investors will pay a premium for repeat founders, experienced operators, or deeply technical teams tackling a high-impact problem.
✔ Market Size – If the total addressable market (TAM) is large, investors may be willing to take a bet on early traction.
✔ Product Defensibility – If your solution has a strong moat (e.g., proprietary data, network effects, regulatory advantages), you can justify a higher valuation.
✔ Investor Competition – The more investors fighting for your deal, the higher your valuation will climb.

📌 Brian Hollins (Managing Partner, Collide Capital) advised founders to lean into storytelling to command stronger valuations:

💡 “If you’re early in customer validation, help investors understand your unique insights into the market. Show them why you’re the right person to solve this problem.”

Key takeaway: Valuation is a mix of investor sentiment and company fundamentals. Founders should be aware of market trends but avoid chasing inflated numbers that aren’t tied to real business value.

3. The 2024 Valuation Landscape: What Founders Need to Know

After the funding boom of 2021, early-stage valuations corrected significantly in 2023 and 2024. Investors have become more disciplined, and median deal sizes have stabilized across the industry.

📌 According to Pitchbook and NVCA’s Venture Monitor:

✅ The median seed deal size in 2024 was $3.1M—a shift back to more sustainable levels.

✅ SAFEs (Simple Agreements for Future Equity) have grown in popularity as a preferred funding mechanism, particularly in high-burn sectors like AI, where startups need fast capital deployment.

✅ Investors are prioritizing capital efficiency—startups that can show smart use of funds and clear milestones have stronger negotiating leverage.

What This Means for Founders in 2025

📌 Stay grounded in reality – Avoid over-optimizing for the highest valuation; focus on securing the right investors at a valuation that allows for long-term success.

📌 SAFE notes are your friend – If you’re in a fast-moving space like AI, raising on a SAFE can help avoid prolonged valuation negotiations.

📌 Be prepared to justify your number – Investors will challenge inflated valuations. Ensure you have clear market data, customer validation, and a strong growth plan.

💡 Takeaway: The funding landscape has shifted toward more rational valuations—founders should focus on strategic pricing rather than chasing the highest possible number.

4. Avoiding the “Overpriced Startup” Trap

One of the biggest risks founders face when raising at an early-stage is setting their valuation too high—which can create long-term challenges.

🚨 What Happens If You Overprice Your Round?

🚫 It becomes harder to raise your next round – If your company doesn’t hit aggressive milestones, investors will be hesitant to back a down-round.

🚫 Future dilution becomes a problem – A sky-high pre-seed valuation can limit your ability to raise later rounds without massive dilution.

🚫 Investors may walk away – Some VCs won’t even engage if they think your expectations are unrealistic.

💡 Kelly Mak put it simply: “Raising at an inflated valuation might feel good in the moment, but it can create massive problems down the road.”

How to Set a Realistic Valuation

📌 Benchmark yourself against recent deals – Look at similar companies in your sector to understand the going market rate.
📌 Be flexible – It’s okay to start high and negotiate down, but be willing to adjust based on investor feedback.
📌 Consider staged raises – A SAFE note or lower initial valuation with performance-based step-ups can keep the deal moving.

💡 Takeaway: Setting a reasonable valuation today increases your chances of raising successfully in future rounds without facing a down-round.

Final Takeaways: How to Think About Valuation in 2024

✔ Valuation is fluid. At pre-seed and seed, your valuation is often dictated by investor interest, not just company metrics.
✔ Market trends matter. In hot sectors like AI, valuations can be inflated—but that doesn’t always mean they’re sustainable.
✔ SAFE notes are gaining traction. More founders are raising on SAFEs to simplify early-stage financing and avoid overpricing.
✔ Investor competition drives valuation. The more demand for your round, the higher your price—but don’t over-optimize.
✔ Clarity wins. Investors want a clear story about your problem, solution, and growth path—that’s what drives strong valuations.

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Frequently Asked Questions (FAQ)

1. What factors influence early-stage startup valuation?

Startup valuation is influenced by market trends, investor competition, team strength, product defensibility, and total addressable market (TAM). While traction and revenue play a role, investor sentiment and deal dynamics often dictate valuation at the pre-seed and seed stages.

2. How can founders justify their startup valuation to investors?

Founders should provide clear data on market size, customer validation, competitive advantages, and growth potential. A compelling narrative that highlights why the team is uniquely positioned to succeed can also help justify a higher valuation.

3. Why do some startups receive inflated valuations?

Startups in hot sectors like AI, fintech, and climate tech often see inflated valuations due to investor excitement and competitive deal-making. However, high valuations aren’t always sustainable and can create challenges in future funding rounds.

4. What are the risks of setting a valuation too high?

Overpricing a startup can make future fundraising difficult, lead to excessive dilution, and deter potential investors. If a company fails to meet growth expectations, it may face a down-round, which can negatively impact its credibility and investor confidence.

5. What are SAFE notes, and how do they affect valuation?

SAFE (Simple Agreement for Future Equity) notes allow startups to raise capital without setting an immediate valuation. They provide flexibility in early-stage financing and can help avoid overpricing while securing investor commitments.

6. How do investor competition and market trends impact valuation?

When multiple investors compete for a deal, valuations tend to rise as they seek to secure allocation with minimal dilution for the company. Conversely, in a less competitive market, startups may have to accept lower valuations based on investor ownership targets.

7. How can founders set a realistic valuation for their startup?

Founders should benchmark against similar deals in their industry, remain flexible in negotiations, and consider staged raises or SAFE notes to align valuation with business growth milestones.

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