October 2014 status - a live autopsy and question

I did.

I used a fairly standard equation for a company at pre-revenue stage which factors in the number of engineers, the potential exit value, and so on to determine the likely value of the company at that time.

Until revenue is coming in and can be used along with growth to perform more accurate calculations, valuations are really a rough guide to the potential return should the company be acquired. I was guided on this by other founders who did sell their company after a couple of years for way above £2m, but obviously one factors in the risk that you don't sell and mark down the valuation. The figure also correlated with a SV rule of thumb that values a company at roughly $1m per engineer plus whatever value is already on the books from the first round. So the method of pre-revenue valuation agreed with other startups, and was additionally accepted by the accountants.

Valuations are always at that time. And if I were asked a few months ago, I would have answered that the round we were doing was likely going to be a "down round". In that we were behind our projected progress at that time and we had dropped our valuation to reflect the reality of our progress. We also knew that by doing so we might attract an angel with reputation enough to raise the valuation again... that is, if by bringing on the right people we de-risk future fundraising then we would've managed to improve the chances overall and that would lower the risk that we would fail (in the way we did), which would've increased the valuation again.

It's all ups and downs. One cannot make it too complex as the valuation is a mix of known things (number of engineers) and unknowns (potential exit value and future earnings potential). To try and make it too complex is to lie... it implies those things are known and fact... they are not. So instead it's more "we've got 2 engineers and this tech, and we believe the future revenue is X for a growth rate of Y, and a likely acquirer would have to pay roughly Z and we only have a 20% chance of selling the company so the value is AA". So long as everyone accepts that... that's the value.