TEN13 is a Brisbane-based Australian venture capital syndicate founded in 2019 by Stew Glynn and Steve Baxter. This article is the transcript and companion reference for Flight Club #5 - The Art and Science of Venture Valuations, the fifth and final session in TEN13's investor education series. It covers why valuations matter, how they differ by stage, the qualitative and quantitative factors that drive them, and the non-monetary terms that can matter as much as the headline number.

Why Valuations Matter

TEN13 invests first cheques of A$300,000 to A$2 million at pre-seed and seed stage in technology companies across Australia, New Zealand and globally. Valuation is one of the most consequential terms in any deal, for both founders and investors.

Partner An Vo opened the session by framing valuation as a balancing act. For founders, a higher valuation means a larger eventual financial outcome, but also more dilution and less control over a company across what is typically a seven-to-ten-year journey. Price a round too aggressively in the founder's favour and, on the other side, an over-diluted founder may lose the motivation needed to see that journey through. TEN13's team cited a well-known line from Y Combinator co-founder Paul Graham: the best valuation is one that both the founder and the investor are happy with.

For investors, valuation directly affects fund returns and performance, and is linked to the ownership and rights an investor holds in a company. A higher valuation typically buys more ownership, more voice and more influence over the company's direction, all else being equal.

Valuation is a matter of perception, not of fact. - Peter Thiel, Partner, Founders Fund

Pre-Money vs Post-Money Valuation

Two foundational terms underpin every valuation discussion:

• Pre-money valuation - the valuation of a company before any external financing is added. It represents what the company is worth on its own, based on factors such as revenue, IP, market size and growth potential.
• Post-money valuation - the valuation after financing has been added, including new capital injections and any expansion of the Employee Share Option Pool (ESOP), which can also dilute existing equity holders.

Pre-money valuation + invested capital + ESOP expansion = post-money valuation.

"Pre-money" and "post-money" are often used interchangeably, and founders - particularly less experienced ones - can get confused between the two. Dilution and multiples are always calculated on the pre-money valuation, and TEN13 recommends confirming which figure is being discussed in writing to make sure both sides are aligned.

Two Approaches to Valuing a Startup

TEN13 primarily uses two broad approaches when evaluating a startup.

TEN13's team cited a16z co-founder Marc Andreessen's well-known scepticism of discounted cash flow models for early-stage companies: at that stage a company doesn't yet have a stable product, so future cash flows depend entirely on a future product that hasn't been built. Andreessen's view is that early-stage valuation instead needs to weigh the future product roadmap, a bottoms-up market size and growth estimate, and the talent and skill of the team - as he's put it, more fiction has been written in Microsoft Excel than Microsoft Word. It doesn't mean financial metrics aren't important, but at the earliest stages, valuation is, as Peter Thiel has observed, more art than science.

Valuation Ranges by Stage

Venture is a broad, well-established asset class, and companies at different stages tend to trade within fairly consistent valuation ranges. The figures below combine data from Carta, a venture data aggregator, with what TEN13 sees across its own portfolio and partner deal flow, excluding roughly the top and bottom 20% of raises.

Source: Carta.

TEN13's team also cautioned against being too strict on multiples at the earliest stages, from pre-seed through to Series A. Two reasons: first, TEN13 is looking for companies that can break out to hundreds of millions in revenue, and a strict multiple discipline can mean missing those opportunities; second, the best early-stage companies are often growing so quickly that the effective multiple paid can halve within six months to a year, so multiples are not static at this stage.

Overview of stages: valuation, revenue and traction

The Art: Qualitative Valuation Inputs

TEN13 weighs both qualitative and quantitative factors. Four qualitative inputs most influence why one company earns a higher valuation than another company at the same stage.

Case study: two pre-seed deals, two different valuations

TEN13's team walked through two illustrative (approximated but representative) pre-seed deals at the same stage that landed at very different valuations, to show how qualitative factors combine.

Both companies were at a comparable stage of progress, and neither was "better" than the other - TEN13 believed in the founders, the market and the technology in both cases. It's simply that in some instances TEN13 is willing to pay more, based on the combination of qualitative factors above: a more technical and credentialed founding team, stronger sector tailwinds, higher contract values, and a bigger round that required factoring in founder dilution.

The Science: Quantitative Valuation Inputs

As companies mature past seed and begin generating real revenue, quantitative inputs become increasingly important to how TEN13 arrives at a valuation.

TEN13's team noted an important exception: sometimes TEN13 is willing to forego strong traction if the founder or the total addressable market is exceptional. An extreme example cited was Elon Musk's ability to raise significant capital with zero revenue traction, purely on founder quality and market opportunity.

Case study: two Series A deals, two different multiples

Both companies raised at a broadly similar dollar valuation, but earned very different revenue multiples. The main driver was growth rate: Deal #2 was growing so quickly that, projected six to twelve months forward, its effective multiple becomes far more comparable to Deal #1, since it can grow into its price quickly. A more SaaS-weighted, stickier revenue base also supported the higher multiple.

Understanding Revenue Multiples

TEN13 treats public market comparables as the closest available relative guide to private company value, since most venture-backed companies are ultimately either acquired by a public company or, for a smaller number, eventually list publicly. Because private and public markets are connected, TEN13 tries to keep private valuations within a sensible range of public market multiples.

Key data sources TEN13's team uses include PitchBook (data on what VC-backed companies are trading at) and the Bessemer Cloud Index (a benchmark of publicly listed software companies and their revenue multiples). Two caveats the team flagged when applying public multiples to private venture deals:

• Public companies are typically growing more slowly, so they carry lower multiples than a comparable high-growth private company might command.
• Public multiples are usually based on the last twelve months of actual revenue, whereas the venture market tends to use forward-looking ARR (annualised recurring revenue) figures, which can inflate the apparent multiple on the private side.
• It can also be difficult to find reliable multiples data for private companies in the first place, since much of it isn't publicly disclosed.

Data referenced from the Bessemer Cloud Index put the median multiple at 5.1x, the top quartile at 8.12x and the bottom quartile at 3.27x.

Why AI Companies Currently Command a Valuation Premium

TEN13's team addressed directly why AI companies are, at the time of this session, attracting higher relative valuations than non-AI companies at similar stages. Data referenced from CB Insights showed AI companies earning a premium over non-AI companies of roughly +21% at seed, +39% at Series A and +59% at Series B in 2023.

TEN13's team framed this as a recurring pattern rather than something unique to AI: a few years earlier it was crypto, and before that it was autonomous vehicle companies. Whatever the specific category, the pattern is the same: companies operating in a brand-new market with relatively low competition, a lot of greenfield space and a market with global implications tend to command higher valuations, because the size of the potential opportunity and the chance to find the eventual market leader typically leads to less pricing discipline across the market.

It's Not Only a Numbers Game: Terms That Matter as Much as Valuation

Valuation, while central, is only one term among several that determine the actual economics of a deal for TEN13, investing on behalf of its 500+ investor network.

• Valuation caps and discounts - relevant when investing via a Simple Agreement for Future Equity (SAFE) or a convertible note; these terms can materially change the effective price ultimately paid.
• Liquidation preferences - govern downside protection and the order in which shareholders are repaid. TEN13's standard when buying shares is a 1x non-participating liquidation preference; these are uncommon at later stage but worth understanding at pre-seed and seed.
• Anti-dilution clauses - provide downside protection if the company later raises at a lower valuation (a "down round"), adjusting an investor's effective share price to compensate.
• Most Favoured Nation (MFN) clauses - give an investor the ability to "piggyback" onto more favourable terms if the company later raises on a preferential set of terms the investor didn't originally receive.
• Other common inclusions - board seats or board observer rights, founder vesting, information rights and pro-rata rights.

TEN13's team encouraged investors to review Flight Club #3, "Navigating Venture Terms," for a deeper dive on these clauses.

Founder Dilution and Ownership Over Time

As new shares are issued in each funding round, a founder's ownership percentage decreases. Ideally, founder ownership remains high enough through each round to keep incentives aligned with investors.

Source: IceBreaker VC.

Dilution is typically heaviest in the earliest rounds and slows as a company matures, though the rate at which founders are diluted continues to decline as fewer, larger rounds are needed relative to the company's growing valuation.

Case study: Go1

TEN13 used Go1, a global corporate education and learning company, to illustrate how founder and investor ownership can play out over a company's full life cycle. Go1 was first backed in 2016 through Steve Baxter's family office, prior to the launch of TEN13, when the company had modest revenue and a first valuation of around $10 million. Through multiple subsequent funding rounds, including a Series A led by Seek in 2017 and a US$200 million raise led by SoftBank in 2021 at a US$2 billion valuation, Go1's most recent public valuation sits at roughly US$2 billion. Go1 acquired Blinkist in 2023 to expand into consumer education.

The team at TEN13 have all been incredibly supportive. We were lucky enough to have Steve join our board in the early days, and have benefitted from both his, Stew and the broader team's advice. When founders ask who I would recommend talking to, I always put TEN13 forward. - Andrew Barnes, Co-CEO and Co-founder, Go1

Fund Ownership: Why Dilution-Adjusted Returns Matter

The goal of venture investing isn't simply picking a winner, it's owning as much of that winner as possible by the time it exits, since that's the point at which ownership actually converts into a return. A simple $100,000 investment at a $10 million valuation in a company that later exits at $1 billion sounds like a 100x return, but that ignores the dilution an investor experiences across every subsequent funding round.

Example return: 42x ($100k → $4.2m) - a strong outcome, but a long way short of the "100x" headline figure before dilution is accounted for.
This is an investment example, not an expected return. This is a targeted return, and may not eventuate. Specific risks may impact on the possibility of such a return in future.

This is why pro-rata rights and doubling down into portfolio winners as they emerge matter so much - dilution across successive rounds can materially erode an early investor's eventual ownership if they don't continue to participate.

Behind the Scenes: How TEN13 Models a Valuation

Once a company sits within a sensible range, arriving at a specific valuation number involves real technical modelling work - perhaps unsurprisingly, still done mostly in spreadsheets. Some of the complexity TEN13 navigates includes:

• The conversion of SAFEs and convertible notes into equity at a future priced round, which can materially affect final ownership and share counts.
• Modelling future fundraising rounds, market conditions, and a range of downside and upside scenarios to sense-check a given valuation.
• Building a financial return analysis across multiple time horizons (commonly 5, 7 and 9 years) and multiple exit revenue multiples, to understand what TEN13's return and return multiple would look like under different outcomes, factoring in liquidation preferences and each investor class's claim on proceeds.

While a number can appear to be "picked" from within a range based on qualitative and quantitative attributes, in practice significant modelling work sits behind that final figure before TEN13 offers terms to a company.

Who Presented This Session

Collectively, the TEN13 investment team brings 30+ years of combined venture capital investing experience, has deployed $120m+ in funds under management, has backed 100+ companies, and holds 8 board positions across the portfolio.

Further Resources

Frequently Asked Questions About Venture Valuations