Business valuation is tricky for Start ups, given the unpredictability of revenue generation and an ambiguous future. Seasoned publicly listed businesses have specific facts and figures to determine a value. However, Start ups have much less data to arrive at a valuation. Notwithstanding the difficulty, you have to value your start up, if you want to raise capital. So, how do you put a value to your Start up that someone is willing to pay?
Sense and sensibility of the right valuation
Despite the ambiguity, it’s possible to assign a value to your Start up that is in line with investors’ expectations.
- Well-founded sounds well: If you research for the valuations of similar companies in your industry and market, you will uncover the potential of your idea. Equipped with this knowledge you can convince investors and defend your Startup’s worth. Seek the advice of accountants and lawyers – as one usually overvalues and the other undervalues Start ups. Reach out to a financial advisor when you hit a roadblock. Ask for their assistance in finding valuations determined in recent financings or M&A deals in your segment.
- Forecast your financial: If you use the research to make 5-year financial projections, you’re well-positioned to defend the valuation. They are looking for that opportunity that multiplies their investment. So, if you showcase the growth that can reap that return for them, you have their attention.
- Complement forecasts with success factors: Businesses that are profitable sooner can seek higher valuations. So, consider factors such as likelihood of success and the quality of the management team in your presentation.
- Apply rules of economics: Use the most basic economic principles – supply and demand. If your Start up represents a sought after patented technology, leverage it to drive your valuation north. You can also create a perceived demand. Position the novelty of your Start up and leverage on the uniqueness to create the scarcity that pushes your valuation up.
- The stage of development: Investors consider the Start up’s stage of development in their decision to finance it. The investor perceives a lower risk for a progressed Start up and is willing to consider a higher value. Therefore, your Start up’s current form is a key factor in determining its value:
- There is an exciting business idea + a credible team + a solid prototype + Bootstrap financed
- There is a Minimum-Viable-Product + early adopters + Seed stage angels financed
- There are partners + a customer base + a pipeline of prospects + user/revenue growth + Series A venture capital financed
- There is multi-millions in revenue + revenue growth + an obvious pathway to profitability + geared to scale up with a capital raise + Series B/C venture capital financed
- Perceptible viewpoint: Investors are receptive when the specifications of the purpose of fund raising and application of funds is laid out. It also helps to show the promising results from the significant number of tests you’ve put your idea through. Then, you can prove that financing will enable your go-to-market to impact the industry, thus growing and meeting expectations. Transparency about your plans – to go all way through or to exit with the first opportunity –also matters to investors.
Know that, despite all your efforts to arrive at a valuation, the investors might offer a different figure. So, if higher valuations are unable to raise capital, you’ll have to eventually accept the market’s determined value – even if it’s low.