Valuing your startup for relevant investment is one of the most crucial tasks for any startup owner. Startups, in the most typical sense, are new business entities formed by an entrepreneur. The startup organizations should primarily focus on the development of new, unique technologies or ideas while introducing them to the market like a brand-new product or service.
The valuations of a startup company offer insights into the ability of the company to leverage new capital for ensuring growth, meeting the expectations of investors and customers, and achieving the next milestone. While quite impressive, these valuations or calculations are not totally objective. A startup valuation is known to factor in a wide range of aspects -including product, assets, expertise of the team, business model, competitor performance, goodwill, and so more.
Tips to Price or Value Your Startup for Investment
#Decide the Amount of Money You Wish to Raise
Some advisors might suggest raising as much as possible. The tip from angel investors and VCs is to plan raising enough money to last around 12-18 months before you have the need to raise money again. In the process, some important questions you might consider asking are:
- What is your minimum requirement?
- What extra investment do you need?
- How much would be too much?
In case your starting point is analyzing the exact cash you require, you should evaluate the burn rate on a monthly basis. Include team members that you need to hire along with considering important factors like dev costs, marketing expenses, and so more. At the same time, it is also important to understand the difference between venture capital and angel investor.
To succeed in your startup funding process, you should also look for all possible alternatives that could help you save more in the long run. For instance, revenue-based financing solution is your best bet. It is a great solution for startups experiencing rapid growth and requiring additional funding to keep up with the rising demand -without the overhead of equity.
#Decide How Much Company You Wish to Sell
The general rule of thumb for seed or angel stage rounds is that startup founders should expect selling anywhere between 10-20 percent of the overall equity in the organization. This is primarily based on what the early equity investor might be searching for with respect to the overall returns.
Investors will be placing bets on your startup organization with proper knowledge that most of their investment might deliver zero or minimal return. They are eventually exposed to either a high-potential or a high-risk scenario. Therefore, they require a fair share of equity to obtain a meaningful return in case things will perform well.
#Understand the Berkus Approach
The Berkus Approach to startup valuation was created by Dave Berkus -a renowned angel investor and venture capitalist in America. The approach observes the process of startup valuation depending on the in-depth assessment of core success factors -including strategic relationships in the existing market, execution, technology, production, and respective sales.
An in-depth assessment is executed for understanding the amount of monetary value assigned to the specified factors. The startup valuation serves to be the total of the respective monetary values.
#Future Valuation Multiple Approach
This approach for pricing or valuating startups is primarily focused on the estimation of the total returns on investment that investors will expect in the coming future -around 5-10 years. Cost projections and future sales growth are analyzed over the forecast period. Application of a multiple takes place to the right metric for valuing the startup.
#Risk Factor Summation Approach
This approach tends to value a startup by considering quantitative aspects of all risks in association with the business -responsible for affecting the overall return on investment. Under this pricing method, a projected initial method is calculated for the organization along with other methods. To the initial value, the resulting effect (whether negative or positive) of different forms of business-centric risks are also considered. The estimate is eventually added or deducted to the initial value depending on the risk’s effect.
Conclusion
There are several more approaches to pricing or valuing your startup. As a startup owner, you require a proper valuation estimate to justify to prospective investors while trusting other individuals. An accurate valuation will help in coming up with the right long-term capital raising method while keeping your startup funding requests in consideration.
It is important to note that not all startup valuation approaches or methods are highly accurate all the time. In most cases, you are expected to work with more than a single method while combining different techniques to come across a fair value for your startup. Therefore, it is always recommended to leverage the benefits of your company’s comprehensive database towards ensuring that you are in the right place.
