‘Decoding’ Valuations – Part 1: Story Behind the Numbers
Over the last two decades, I have had countless conversations with founders about valuations. It is almost always one of the first questions entrepreneurs ask once we start discussing their idea, and it usually carries with it a sense of anxiety.
Founders want to know where they stand, what investors will think of them, and whether the number attached to their company will feel like a validation of their hard work. But valuation is also one of the most misunderstood concepts in a founder’s journey.
Too often, it is celebrated as a badge of honour. “We raised seed at a $60 million valuation!” There is a mix of pride and relief. But what does that Valuation really represent? Is it an accurate reflection of a company’s true worth, or is it simply the outcome of market timing, negotiation, and the mood of investors at that point in time?
When we launched the Decoding Starting Up series, the aim was to simplify some of the most complex yet fundamental realities of entrepreneurship: co-founder alignment, conflict resolution, building teams, and compliance.
With Decoding Valuations, I want to do the same for one of the most fascinating and confusing parts of building a company: how valuations are set, why they matter, and how founders should think about them with clarity.
In this part, we talk about how founders should approach valuations.
Valuation is never a fixed truth. It is a story that evolves over time - a story shaped by the company’s traction, the founder’s ability to execute, and sentiments of the capital markets.
I have seen companies flourish because they treated valuation as a tool to align with the right investors and set themselves up for sustainable growth. And I have seen companies stumble because they chased numbers that looked good on paper but were impossible to live up to.
One story that has stayed with me is of a company I’ll call Startup A, back in 2016.
The founders were building in a sector that was still unproven in India. When they went out to raise capital, they were presented with multiple offers. Some investors pushed for a higher valuation, while others offered slightly lower numbers but came with deep operational expertise and a genuine commitment to roll up their sleeves.
The founders chose the latter. They gave up a few additional percentage points of dilution, but in return they gained partners who helped refine their go-to-market strategy, introduced them to their first large customers, and opened the doors to stronger follow-on investors.
That single decision changed the company’s trajectory. Had they been fixated on securing the highest possible valuation, they might have ended up with less engaged investors and a weaker long-term foundation.
On the other hand, I remember Startup B, which raised a round in 2021 at the peak of the bull market frenzy. The company was barely a year old, but they secured a staggering valuation because investors feared missing out. For a short while, this looked like a major win. The headlines created credibility, and the founder gained confidence.
But when the company returned to raise its next round a year later, the growth simply hadn’t caught up with the number. The new investors pushed back, questioning why the company deserved a higher step-up.
Negotiations grew tense and ultimately the company had to accept a down round (raising capital at a lower valuation than before).
This was not just a financial setback. It deeply affected employee morale, as stock options suddenly looked less valuable. It strained relationships with early investors, who now felt their earlier enthusiasm was misplaced. In hindsight, had the founder raised at a more measured valuation tied to real milestones, they could have avoided this painful reset.
These two stories illustrate the delicate balance every founder faces.
Valuations matter - they determine dilution, influence hiring, and shape perceptions in the ecosystem. But a high valuation is not always a victory if it comes without substance or with terms that limit flexibility.
I’ve seen many instances where a lofty headline valuation came with aggressive clauses like harsh liquidation preferences, anti-dilution rights that heavily penalised founders in a down round situation, or even IRR guarantees.
In theory, the founder walks away with a great number. In practice, if the company doesn’t achieve a blockbuster outcome, very little value flows back to them or their team.
WeWork is a global reminder of how lofty valuations can unravel when they are not backed by sustainable fundamentals. At one point, the company commanded a valuation of nearly $47 billion. Yet when market reality caught up, the structure of investor protections and the mismatch between story and execution left employees and smaller investors bearing the brunt.
This is the nuance that often gets missed in conversations about valuation. Founders sometimes believe that the “highest number” is always the best outcome. Investors, too, like to push valuations up when markets are buoyant, because higher valuations signal optimism and strength in the portfolio. But valuation is not an isolated metric - it is closely tied to expectations.
When a company raises at a high valuation, it implicitly commits to delivering extraordinary growth in the next 12 to 18 months. If it fails to do so, the very number that once looked like a victory can turn into an anchor weighing the company down.
Timing adds another layer of complexity.
In bull cycles, when capital is abundant, investors are often willing to pay a premium for growth stories. Smart founders recognised this and used the opportunity to raise meaningful amounts of capital, build reserves, and extend their runways - without obsessing over whether the valuation was at its peak. For them, it was about ensuring survival and momentum when markets would inevitably turn.
Others, however, saw the froth as a chance to maximise headline valuations simply because the market was willing to give it. In the short term, that looked like a win, but when sentiment cooled, those lofty numbers quickly became liabilities, leaving companies stuck between inflated expectations and the harsh reality of slower growth.
Conversely, raising at too low a valuation when markets are depressed can feel discouraging, but it may be necessary to simply keep the lights on and prove the business model. Timing, both in terms of market cycles and company readiness, is critical. Without strong product-market fit, a premature high valuation only creates pressure. Every step-up must be earned; otherwise, it sets benchmarks that become nearly impossible to meet.
Founders must ask: are we building for short-term optics, or for endurance?
When we talk about valuations, few fundamental points every founder must know:
1. Pre-money valuation refers to the value of your company before new capital is invested.
2. Post-money valuation is simply the pre-money plus the amount of new capital raised.
3. Dilution - For example, a company raised ₹10 crore from investors at a pre-money valuation of ₹40 crore. This means the post-money valuation of the company is ₹50 crore (₹40 crore + ₹10 crore). The investors now own 20% of the company, which is the dilution to the founders. (₹10 crore / ₹50 crore). Before the round, the founders owned 100% of the company. After the round, their ownership was diluted to 80%.
4. Step-up: When a company’s valuation increases significantly between rounds (last round post money valuation / this round’s pre-money valuation). This is critical for both founders and investors because it reflects progress.
And then there are the terms that accompany the valuation - anti-dilution rights, liquidation preferences, or IRR guarantees - which can dramatically influence outcomes for founders and employees even if the headline number looks attractive.
So how should founders think about valuations?
My view is that they should not treat valuation as a vanity metric, nor should they dismiss it as irrelevant. It matters, but only in context.
A fair valuation with the right investor can often create more long-term value than the highest number from a less committed partner. At the same time, being too cautious about valuation can leave unnecessary dilution on the table.
The art is in finding the balance: pushing for the best possible valuation while ensuring it is grounded in real milestones, sustainable growth, and aligned partnerships.
I always tell founders - any step-ups must be earned. If you push your valuation too high too early, you risk slowing down future rounds because investors will expect extraordinary growth to justify the next valuation.
Key things that I feel founders should remember when they are navigating and pondering too much on valuations:
1. Valuation tells a story. It’s less about today’s metrics and more about how compelling your future narrative is.
2. A fair valuation beats the highest valuation. The right investor can unlock far more value than a number on a term sheet.
3. Avoid the valuation trap. Inflated valuations set benchmarks that may become impossible to meet in future rounds.
4. Dilution is not the end of the story. It’s a necessary trade-off for growth, talent, and building a company that lasts.
5. Timing matters. It is critical to keep the company running, not to end up in a situation where you are striving to keep the lights on just because you rejected an investor that offered a lower valuation. Take the money – prove your model and then demand.
Valuation is not a destination. It is a compass that should guide how a founder raises capital, which investors they choose, and how they plan their growth trajectory.
The most successful founders I have met never treated valuation as the ultimate measure of success. They treated it as a tool - a way to attract the right partners, motivate their teams, and build enduring companies.
At the end of the day, markets reward companies that solve real problems and scale sustainably. A valuation, when done right, is simply a reflection of that belief.
This post is part of our “Decoding Valuations” series, where we share insights and learnings from our journey at Kalaari Capital to help entrepreneurs navigate one of the most critical aspects of building a startup.