There’s no other topic more interesting and controversial than the startup valuation.
Why?
Because unlike established and revenue generating companies, startups’ valuations before revenue occurs are extremely imprecise, and investors know it. This most debated topic also stems from the tug of war between an investor’s wish to value the company based on its current value placing a lower weight on future performance, and the entrepreneur’s desire to value the company based on the future value. When an agreement is reached, it’s mostly somewhere in the middle. Depending on the stage of development of the company and the sector in which it operates, the valuation will take into account several factors:
- The IP value
- The market niche
- The business model
- The growth potential
- The number of customers
- The revenues (if any)
Depending on your personal inclination with regards to numbers, with the sector you’re operating in and on the type of investor you’re engaging, you may decide to take two different approaches:
- Choose to draw up a financial model and a valuation following one of the most commonly used valuation methods.
- Focus on the length of time you want to fund your company to get to a measurable milestone.
Even before choosing a valuation method, I believe that it’s important to highlight what investors are gauging when they decide to invest. We look at the likely return on investment, therefore, the sector the startup operates in will be taken into account. One of the most important concepts to keep in mind is that in the investment transaction both the investor and the founder must reach an agreement feeling that each has achieved a fair deal. The investor will want to have entered into a company at a risky, inexpensive level; the founder will want to feel that they have offered up enough of a share in the company in return for investment as well as the more intangible value deriving from the relationship with the investor. The balance between a cheap valuation or a too expensive one will result in hurting both parties in the long run.
Do you have the optimal valuation for you and for the investor?