Startup valuation, under no circumstances, can be described as a simple affair. While valuing a publicly traded company is more or less straightforward, the case with a rarely profit making startup is not quite the same. Here are several factors that are taken into account while these startups are evaluated. How would the value of a publicly traded company be determined? You can simply multiply the number of outstanding shares with that of the current share price.
The pre-money valuation of other startups is based on the following factors. However, before exploring the ways to value your startup, you should actually understand why you need to value your startup in the first place.
Importance of Evaluating your Startup.
It is believed that valuing a startup is more an art than science. That’s true because valuing them is not squarely about multiplying share values and estimating the total amount of quick cash loans you have. It is important for businesses to be duly evaluated because it’s the valuation of businesses that actually go on to draw investors. In a way, putting a value on their businesses helps entrepreneurs to generate liquidity.
This is perhaps one of those very first few factors that need to be considered while you are in the process of evaluating your startup. Right from the time you had started your venture to the rate of growth you have registered till date – this is exactly what governs your traction. The rate of growth achieved till now – will go on to decide where exactly your company will be headed in the next 1 or 2 years. The investors have the right to ask these questions while they are evaluating a new business. If you are unable to show a positive growth curve within the initial stages of the lifecycle of the business, you cannot really expect major investments there.
Your Market Valuation May Differ from Your Worth.
Now your investors might as well tell you that your business is worth $ 1.5 million. However, you may have more liquid assets because of which you think that your valuation should be more than what your investors have actually spelt out. In this regard, you need to accept what your investors are telling you. You might as well have all your liquid assets and sweat equity in place but if you are unable to raise money for your business beyond the valuation which has been stated by your investors ($ 1.5 million in this case) then your business will be valued at what has been spelt out by the investors. You can always challenge the diktat of the investors here by consulting top accountants and lawyers. The financial forecasts will end up playing a big role here as well.
Your investors will be interested in knowing the total number of customers who are actually paying you. As excited you might be to give freebies to your users and as enthused as they may be to use these freebies – do know for a fact that potential investors are in no mood to entertain free customers. They will actually want to know who are paying you. Here it should be mentioned that “quantifiable” revenue is a must even if you are ready with a pathbreaking idea.
Understand what Profitability is.
Your profitability actually depends on a number of factors. You should duly be aware of the fact that profitability is not what you have earned so far but what you can earn in the near future. Young businesses do take time to catch up on the revenue curve. However, you can focus on the future. You might as well want to determine the number of years it takes to be profitable. If predictions say that there is a long way to go before your business actually attains the kind of profitability which your investors are looking for – then do know for a fact that the companies that are able to demonstrate a quick road to profitability will end up inviting more investors. So, before approaching the investors, it would be prudent on your end to conduct a comparison study. Find out how the comparable companies were valued when they actually reached profitability.
Last but not the least, even if your company becomes successful in inviting investors make sure you aren’t too excited about your future prospects. You still have to live up to the expectations of your investors.