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Pre-Money Valuation vs Number of Founders

Here’s a chart of the day worth sharing.  I was working on some data analysis around the topic of angel round pre-money valuations (which I’ll post soon) and came up with the following interesting charts.  The first chart shows the average pre-money valuation for the first round of US technology companies founded in the last 5 years, provided said round was between one and two million dollars.  It is a pretty narrow filter of the 750+ companies that completed the 2010 CompStudy survey, but there are 55 rounds of financing to look at…enough to be a meaningful dataset I think.

What is interesting is that you see a peak pre-money valuation of $3.16 million with two company founders, which is higher than companies with any other number of founders.

Pre-Money Valuation vs. Number of Founders

If you just looked at this chart, you might come to the conclusion that two founders is the ideal.  After all that fits the anecdotal model of Jobs/Wozniak, Gates/Allen, Page/Brin, etc.  But if you look at the following chart (pre-money valuation per founder), you see that the “marginal value of an additional founder” decreases substantially.

Pre-Money Valuation Per Founder

This chart shows that adding additional founders to the team is in fact dilutive, but also that the more founders the more dilutive.

I once heard a company co-founder say that, “the biggest dilution I ever took was bringing on a co-founder.”  But more often I hear the opposite of how having a co-founder helps balance the team emotionally as well as in terms of skill sets.

Personally I’ve done it both ways (solo as well as with one or more co-founders) and I think the “safety-in-numbers” theory is more typical with first time entrepreneurs than with serial entrepreneurs.  Again, anecdotal though.

So, I’m curious. What is your take?  Is the dilution of co-founders counterbalanced by other factors? Is it worth it or not?

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Categorised as: Entrepreneurship, Startups, Venture Capital

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  • Anonymous

    Unfortunately the data doesn’t let you correlate number of founders with exits or rate of return on capital, to tell you if the investors are pricing these deals correctly.

    • http://www.altgate.com/ fnazeeri

      That’s absolutely correct, although we can look at other metrics like “step up in subsequent rounds” on which I hopefully will be able to post more soon.

  • Anonymous

    Good point re distinction between first time entrepreneurs and serial entrepreneurs. Find a smart colleague you’ve worked well with before, who has complementary skill sets and/or personality—and you *might* have found a good cofounder.

  • http://www.metamorphblog.com Matt Mireles

    As a first time non-technical CEO who started off solo, having 2 technical co-founders is awesome. They bring binary value to the team, and I wouldn’t trade them for anyhting.

  • Jonathan

    Having a co-founder is key, both from so many perspectives–not the least of which is emotional and having someone to bounce ideas off of. Not every combination works, but when you have the right personalities/skillsets together, it’s a powerful force.

    My feeling is that 50% of something is still way better than 0% of nothing. I don’t think I’d have made it without my co-founder.

    • http://www.altgate.com/ fnazeeri

      Improving the probability of success is the key to, well, success but I don’t think it’s clear that multi-founder startups have a higher success rate than solo-founder startups. It’s an area that needs more research…

  • http://twitter.com/lesniewski Chris Lesniewski

    One concern is that the data are postselected to only contain companies that successfully completed a funding round. If having co-founders changes the probability or rate of closing funding rounds, it would substantially change the conclusions.

    Nit: your second graph doesn’t show the marginal value of an additional co-founder. Based on your first graph, to the *company*, the marginal value of the second founder is $1.05M, the third founder is -$.61M, and the fourth founder is a wash. To the *first founder* the marginal value of every cofounder is negative (which is your point).

    • http://www.altgate.com/ fnazeeri

      Good points. I should have written “value of a founder” instead of “marginal value.”

      The selection bias is a tough one…there’s not really a way to get good data on companies that blow up….especially those that blow up on the launch pad. I’m intrigued though. Perhaps the are other tell-tale metrics like time required to raise money vs. number of founders…need to think more on that.