Startup Valuations Are too High for Investors

Startup Valuations Are Too High to Be Attractive to Investors

Inflated valuations that neither match growth nor market dynamics often hinder startups, which should lower their expectations when seeking capital. This is the perspective of Jan Rezek, Managing Director at Nordic Innovators Corporate Finance, who finds that in 3 out of 5 investment cases, startup valuations need to be corrected.

In the dynamic world of startups, valuation is not just a number—it’s a reflection of ambition, belief in the team, and the potential of the technology. In the pursuit of high valuations, many founders overlook the nuanced implications of these figures.

At Nordic Innovators Corporate Finance, we have observed a recurring pattern among Danish startups and scaleups: A fixation on increasing company valuation without fully understanding the consequences.

The Double-Edged Sword of High Valuations

Valuations in the startup ecosystem have been a hot topic of debate. High valuations are often seen as a testament to a startup’s market potential, as well as trust in the company and its founders. However, this pursuit comes with its own set of challenges. A valuation not supported by tangible growth in revenue or market traction can lead to disillusionment among both investors and founders.

The key is finding balance. Founders should aim for minimal dilution over time while building a successful company. This can be achieved, for instance, through a strategic mix of equity financing and leveraging national and European innovation grants—an area where Denmark excels within the EU.

For startups expecting multiple funding rounds—which is often the case in Denmark, where companies typically raise capital 3-5 times during their lifecycle—an inflated early valuation can be detrimental. An overly ambitious valuation in the initial stages can result in flat or down rounds later, complicating future fundraising and potentially sending harmful signals to the market.

For example, in 3 out of 5 cases we handle in preparation for funding rounds, we adjust "overvaluations" to ensure the case is both attractive and realistic for professional investors. Without such adjustments, the startup might otherwise appear unappealing or impractical.

Founders Setting Themselves Up for Disappointment

Consider a pre-product company raising DKK 5,000,000 at a pre-money valuation of DKK 95,000,000. By doing so, they set expectations and demands for themselves that they may not fully realize. For an investor seeking a 10x return, their 5% equity stake (in this case) would need to be worth DKK 50,000,000 at exit. Assuming no further dilution, this requires the company to achieve a valuation of DKK 1 billion within 5-8 years—the typical timeframe for many venture capital funds and private investors. Is this possible? Absolutely. Statistically likely? No.

A sensible approach for entrepreneurs is to strategically plan their fundraising journey, stay realistic about growth expectations, and increase their awareness of transactions in the market. It’s crucial to understand the total capital required to become self-sustaining without relying heavily on venture capital. Equally important is to evaluate the cumulative dilution across all funding rounds and the type of investors the company aims to attract.

 Startups Should Take a Long-Term View on Fundraising

In today’s market, strategic or industrial investors are often more attractive due to their interest in factors beyond purely financial returns. Unfortunately, many Danish startups fall short in this area, typically planning their fundraising only a year ahead and being overly optimistic about timelines. In a capital market where closing a funding round within six months is challenging, such optimism can lead to significant setbacks.

Experienced early-stage venture and angel investors are well aware of the risks associated with taking excessive equity stakes early on. For example, DanBan investors typically aim for 10-15% ownership, with a primary focus on achieving an 8-10x return. They also recognize the opportunity costs founders face.

Excessive dilution early in a company’s journey can reduce founders’ motivation to grow the business. As a result, many investors in Denmark and Scandinavia advocate for founders to retain at least 60% ownership in the early stages post-funding. This perspective is particularly relevant in regions with less developed early-stage venture capital markets, such as Norway’s highly risk-averse VC environment and its lack of a robust angel investing ecosystem.