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Why 70% of Startups Undervalue Themselves – And How to Fix It

A founder walked into a meeting with a VC last year. Strong product, paying customers, three years of consistent revenue growth. The investor asked what valuation they were raising at.

The founder said a number. The investor paused, then said: “That’s quite low for where you are.”

The founder had undervalued their own company by nearly 40%. Not because the business wasn’t strong. Because nobody had ever sat down and actually worked out what it was worth.

This happens more than most people admit. And it’s not a small mistake. Walk into a funding conversation undervalued and you give up equity you didn’t need to give up. You set a benchmark that follows your company through every subsequent round. You signal to investors, without meaning to, that you’re not sure of your own numbers.

So why does this keep happening, and what actually fixes it?

The Undervaluation Problem Nobody Talks About Openly

Overvaluation gets all the press. Startup bubbles, inflated rounds, down rounds, the whole narrative around 2021 and 2022 was about companies raising at multiples that didn’t hold up.

But undervaluation is just as real and far less discussed. Partly because it feels like a safer mistake. You raised money, the deal closed, the business is funded. What’s the problem?

The problem shows up later. When your Series B investor looks at your Series A valuation and the implied dilution and starts questioning whether the previous round was priced correctly. When you’re trying to do an ESOP refresh and the numbers don’t make sense relative to what you raised at. When a strategic acquirer does diligence and finds that your own internal estimates of the business were below what comparables in your sector were fetching.

Undervaluation isn’t a safe mistake. It’s a mistake with a delayed cost. And by the time you feel it, it’s already in your cap table.

The 70% figure isn’t from a formal study. It’s from having these conversations with founders, regularly, over a long period. It’s the pattern, not the stat, that matters.

Why Founders Get the Number Wrong

It’s not about intelligence or effort. Founders who are genuinely excellent operators still get this wrong for a few consistent reasons.

The first is anchoring to revenue. Many founders think about valuation as a multiple of revenue, pull a number from what they’ve heard in their industry, and apply it. That works sometimes. It ignores a lot of other things almost all the time.

The second is emotional conservatism. Founders, especially first-time ones, are often afraid of being seen as greedy or out of touch. So they shade low. The logic is: better to underpromise and be taken seriously than to overprice and be laughed out of the room.

The third is genuine ignorance of methodology. DCF, comparable transactions, precedent multiples, net asset value. These aren’t complicated once you understand them, but most founders have never had anyone walk them through which method applies to their business and why.

And the fourth is not working with an accounting firm or advisor who does this regularly. General financial advice is not the same as startup valuation advisory. The gap between them is where a lot of money quietly disappears.

What Actually Goes Into a Startup Valuation

The short answer: more than most founders think.

A proper valuation looks at:

• Financial performance: revenue, margins, growth rate, consistency
• Future projections: how credible they are and what assumptions underpin them
• Market size: how big the opportunity actually is, not just what the founder says it is
• Competitive positioning: what makes this business defensible
• Team: experience, track record, gaps
• Cap table and structure: existing investors, convertible instruments, ESOP pool
• Comparable transactions: what similar businesses have raised or sold for recently

The methodology used depends on the stage. Early-stage startups with limited revenue often use the Venture Capital method or a scorecard approach against comparables. Later-stage businesses with stable cash flows can support a DCF. Businesses being acquired typically use a blend.

This is what business valuation services actually cover when they’re done properly. It’s not just running a spreadsheet. It’s building a defensible case for a number using the right tools for the stage and sector.

When founders try to do this themselves, they usually get the methodology wrong even when they get the inputs right. And investors know immediately.

The Hidden Assets Most Founders Don’t Count

Here’s where a lot of value gets quietly left out.

Intangible assets. Most startups are built on things that don’t show up cleanly on a balance sheet: proprietary technology, a brand that customers genuinely prefer, long-term contracts, a user base with high switching costs, a distribution relationship that took years to build. These are real, significant assets. In a proper corporate valuation, they get assessed and included.

In a founder’s back-of-envelope calculation, they almost never appear.

Think about what this means practically. A SaaS company with Rs. 8 crore ARR, 90% gross margins, and a proprietary data layer that competitors would struggle to replicate is worth considerably more than a company with the same ARR and thinner defensibility. The intangibles are the difference. Not counting them is leaving that difference on the table.

Customer concentration is another one, but in reverse. If 60% of your revenue comes from two clients, that’s a risk factor that reduces value. Founders often don’t factor this in either, which means the valuation they walk in with can get negotiated down by an investor who spots it immediately.

Both directions matter. Count the assets you have. Acknowledge the risks that exist. A valuation that does both is more credible, not less.

ESOP Valuation: The Piece That’s Almost Always Missing

This is the one that surprises founders most when they hear it.

ESOP valuation isn’t just an HR thing. It connects directly to your overall valuation story and, if you have or plan to bring in foreign investors, to your FEMA compliance too.

Here’s the problem that shows up: a startup issues ESOPs to key team members at a strike price based on a rough internal estimate of share value. Two years later, they raise a round. The round price implies a very different value per share. Now the ESOP accounting is off, the employees’ tax positions are unclear, and the investor doing diligence is asking questions about the equity structure that the founder can’t cleanly answer.

A proper ESOP valuation, done at the time the options are granted and updated regularly, prevents all of this. It also gives employees a clear, honest picture of what they’re holding, which matters for retention.

For startups thinking about bringing in foreign investment down the line, FEMA valuation advisory and ESOP valuation need to be consistent with each other. If they’re done by different people with different assumptions, the numbers can conflict. And conflicting numbers in a cap table are the kind of thing that stalls deals.

When You Need Proper Business Valuation Services

Not every startup needs a full formal valuation every year. But there are specific moments when not having one is a real problem.

Raising a round. This is the obvious one. Going into a funding conversation without a properly supported valuation is like going into salary negotiations without knowing what the market rate is. You might get lucky. You’ll more often leave value behind.

Issuing ESOPs. As covered above. The strike price needs to be based on something defensible, not a guess.

Bringing in foreign investment. FDI valuation under FEMA has specific compliance requirements. The valuation needs to be done by a qualified person using an RBI-accepted methodology. This isn’t optional.

Transferring shares. Any time shares change hands, whether between co-founders, to early employees, or to a new investor, the price should be based on a current valuation.

Planning a merger or acquisition. If you’re acquiring another business or being acquired, the deal price is only as good as the valuation work behind it.

For startups based in Maharashtra, finding valuation services in Mumbai that understand the startup ecosystem specifically, not just large corporate valuation, makes a real difference. The assumptions that apply to a pre-revenue startup are different from those that apply to a profitable SME. Sector context matters.

What Investors Are Really Looking for in Your Numbers

Investors don’t just look at the valuation number. They look at how you arrived at it.

A founder who says “we’re raising at 50x revenue” without being able to explain why is a red flag. A founder who says “we benchmarked against five comparable SaaS transactions in our segment, applied a discount for stage and revenue scale, and arrived at a range of X to Y based on our projected 18-month ARR” is someone who understands their business.

The methodology signals competence. It also makes the negotiation more grounded. Instead of two parties arguing about a number, you’re discussing assumptions. Which ones do we agree on? Which ones are we looking at differently? That’s a much more productive conversation, and it usually ends closer to where the founder wants to be.

Investors also look at consistency. Does the valuation align with the equity structure? Does the implied dilution make sense given the round size? Are the projections underlying the DCF coherent with the historical performance? Gaps between any of these get flagged immediately.

The founders who walk into these conversations prepared, with numbers they can defend and a clear methodology behind them, close deals faster and on better terms. That’s consistently true.

How Demergers and Acquisitions Change the Valuation Picture

Startups don’t always think about demergers and acquisitions early on. But they come up more than expected.

A co-founder exits and their stake needs to be valued for the buyout. A complementary startup approaches about a merger. A corporate acquirer starts a conversation about buying the product or the whole company. In each of these situations, a current, defensible valuation is the starting point for everything that follows.

Acquisitions in particular are where undervaluation really bites. If your most recent formal valuation is 18 months old and based on assumptions that have changed, an acquirer will use that to anchor negotiations. If your valuation is current and properly supported, you’re negotiating from your number, not theirs.

The same applies on the buy side. If a startup is acquiring a smaller business or a specific asset, understanding the fair value of what they’re buying is basic diligence. Overpaying for an acquisition because nobody did the valuation work properly is a mistake that shows up in the next fundraise.

Finding the Right CA Firm in Mumbai for Startup Valuation

Not every CA firm in Mumbai does startup valuation. And not every firm that does valuation understands the startup context.

A chartered accountant in Mumbai who works primarily with large established businesses will approach valuation very differently from one who understands pre-revenue startups, growth-stage companies, and the specific investor expectations in the Indian VC ecosystem. The methodology, the comparable selection, the assumptions around growth rates, all of it needs to reflect the startup reality, not the traditional business reality.

What to look for: have they done valuation work for businesses at your stage? Do they understand the specific compliance requirements if you have or plan to have foreign investment? Can they produce a report that will hold up in investor diligence, not just in a statutory filing?

The last question is the one most founders forget to ask. Statutory compliance and investor credibility are different bars. You want someone who can clear both.

How to Fix Your Number Before Your Next Conversation

Practical steps, in order.

First, pull together your actual financials. Not the management accounts you share internally. The clean version, with adjusted EBITDA if applicable, and a clear revenue recognition policy. This is the foundation everything else is built on.

Second, think about what comparables exist in your sector. Which startups at a similar stage have raised recently? What multiples were applied? This gives you a reality check before you talk to anyone.

Third, get a proper valuation done 3 to 6 months before you actually need it. Not the week before a pitch. Early enough that you can address any issues the process surfaces, and early enough that the report is current when you use it.

Fourth, make sure your ESOP valuation is up to date and consistent with your round valuation. If you have foreign investment or are planning to bring any in, make sure the FEMA valuation advisory side is handled at the same time.

Fifth, work with someone who does this regularly, not someone doing it for the first time alongside your other compliance work.

The founder from the opening of this piece went back, got a proper valuation done, and raised their next round at a number that was 60% higher than what they’d originally planned to ask for. The business hadn’t changed. The understanding of what it was worth had.

Your Business Is Probably Worth More Than You Think

Most founders who undervalue themselves don’t do it deliberately. They just haven’t had anyone help them see the full picture.

At ValuGenius, we work with startups across sectors to build valuation work that holds up: in investor conversations, in ESOP structuring, in FEMA compliance, and in M&A diligence. Our team in Mumbai covers business valuation services, corporate valuation, ESOP and FDI valuation, and the full advisory around fundraising and strategic transactions.