The question of business valuation for startups is one that usually comes when there are prospects for financing on the horizon. Measuring the real value of a company – especially one that is only a few months old is tricky. The valuation of a startup is further compounded by the fact that most of them generate very little revenue and aren’t making any relevant sales. If you need to raise startup capital, determining your value is important. There is no cut and dried means of valuing businesses and as such, company valuation is more of an art form than it is a science. The answer to the startup value question is a rather simple one: your startup is worth what someone is willing to pay for it. However, it is possible to master the art of startup valuation and assign to your business a value that is satisfactory to both founders and the investors. Here are some key points on how to value your startup, in a way that will make sense to you, and will tally with investor expectations.
Use supply and demand: One of the most basic economic principles comes into play when valuing your business. If your startup is leveraging a new technology with lots of potential, you can drive your value up by getting several different investors to compete for the deal. This is in line with the economic principle that states that the lower the supply, the higher demand will be. Even if you cannot get real demand by having multiple investors vying for your business, you can make one single investor believe that you are receiving offers from several different investors. This will drive up the value of your business to that investor and you will be able to get a better deal from them. It’s important to never let an investor think that they’re the only one interested in your business because it will definitely bring your value down.
Consider your industry: Valuation of startups also differs by industry. An example is the value of a new delivery business versus that of a startup that leverages VR/AR technology. Do proper research of the valuations of startups in previous investments that are in your industry before giving investors a value. If you feel you do not have access to relevant valuation statistics for your industry, get in touch with a reliable financial advisor that can assist you.
The stage of your business: The current stage of your business also matters when valuing your startup. There are roughly five groups startups are ranked by as regards the developmental stage they’re in.
- The first group is startups that have an exciting, promising business idea
- The second group have a skilled team of both niche experts and at least one member that’s a good businessman or woman.
- The third group has a product that’s promising and also has some early adopters.
- The fourth group has a proper customer base as well as partners and a bunch of prospects.
- The final group has seen tangible growth in revenue and has a clear means of making the business profitable.
Most investors use this grouping mechanism(even though they may apply it more loosely than has been done here) to come up with a range for the value of a startup. In other words, the more progress a business has achieved, the higher the value put on it – obviously! This is because the risk involved decreases more and the chances of the business being a success increase more the further along the startup progresses.
The chances that investors will accept your valuation go up significantly if you can be specific on why you need the funding and how you will use it. Unless you can back up a high valuation with growth potential and are ready to put in the work needed to move up, go with a more modest valuation. You can prove your value to doubtful investors by testing your idea out a few times and showing results that prove that with some investment, you have something to offer the industry and can grow to meet expectations.