As a founder of two web start up’s, having raised through VC’s and angel investors, I understand the importance of realistic valuations.
Unfortunately, it seems many founder’s don’t.

It continues to surprise me how entrepreneurs reach the valuations on their seed start up’s.
By seed, I’m refering to companies where there is no product, no IP, no assets, no users and no revenue.
I have been speaking with a number of founders recently, all looking to raise their first outside financing to take their “idea” into development. In almost every case, this is what I found:

• Most founders estimate valuation based on what they THINK the business looks like in year 5, not what it IS right now. We all know that with very few exceptions, a business will not look like you think it will by year two, let alone year 5.
• Nearly all founders I spoke with wanted to take a salary from the business immediately. This, for me, is an absolute deal breaker. Part of the investment and commitment founders make is salary sacrifice until the company at least has revenues and most likely, profits. Salaries should be reserved for employees deemed essential to drive the business IE: developers, sales and marketing.
• Half of the founders I spoke with had not (and were not planning to) invest themselves. Deal breaker number 2 for me. If I am going to take a risk, I expect the founder to. If they can’t, they aren’t ready to start a business. (For clarification, I’m not talking about tens of thousands, but an amount they are comfortable with (usually between £5-20k) to ensure they have real skin in the game and something to lose.
• The cost modelling within most budgets I have read are crazy. Highlights include £10,000 a month for office space, £35,000 a month on marketing, sunk costs of £100,000 on hardware, hiring of non essential FTE’s including PA, HR and QA. (now some of you may think QA is critical and I agree, but not for a seed business yet to develop a product and possibly not for a start up in its first year.

I don’t think this is a true reflection on UK entrepreneurs starting up in business, but even still, I’m staggered these people seriously expect to raise outside investment and fail to see their rationale, business planning and expectations are ridiculous.