Factors which Influence Startup Valuation

Initial funding is known as ‘Seed Funding.’ Seed funding is the money that is used to develop the resources of the start-up. The initial capital required for raising money is known as the seed fund.

How to raise money?

One of the main questions for every startup is raising money. There are different sources of raising money, however, founders would want to know the ideal source for fundraising their startup. Some startups would utilize methods such as bootstrapping. Not all businesses would be lucky to have a successful bootstrapping opportunity. However, there are other sources to secure funding for a startup.

Some start-ups require more money to carry out their day-to-day business activities. Tech start-ups require more funding to make their presence in the segment where they are operating. Hence funding is a crucial requirement for the business. These startups require some capital before they achieve their profits and breakeven.

Funding is not straightforward; it takes long hours and is an arduous process to achieve a break-even. Nevertheless, every founder must go through the grind of funding.

Valuation of a Startup

Before going for funding, founders and valuers must know the basics of founding a startup. Startup valuation forms the bread and butter of valuation. By measuring the real value, the startup would know its worth. This is the first step in carrying out startup valuation.

A valuation can be understood as quantifying the net worth of the startup. The real value of the startup is measured through variables. When you want to value a product, you would go into the basics such as finding out the raw materials which were put into manufacturing the product. All the stages of manufacturing the product would go into determining the value of the product. An analogy to this is startup valuation.

However, startup valuation is not an easy task like determining the value of a product. A lot of thought is required before valuing a startup.

Why is Startup Valuation carried out?

It is obvious that startup valuation is carried out to determine the value of the startup. This is one of the crucial factors for the founders of the business. Along with the founders, even investors are keen to understand what equity stake they are receiving for their investment.

There are two ways to look at it to understand valuation. From the perspective of the founders and investors. Founders want to receive funding. The more funding, they receive the better for their start-up. Hence, they require to pitch themselves to investors for more value.

Investors are more interested in the amount of stake their receive at the end of the valuation process. The more stake they receive the better investment they would provide. Hence it is understood that startup valuation is not only important to the founders but also important to investors. Investors would know the net worth of the business and how much stake they receive in return for the funds invested in the business.

Usually, startup valuation is carried out in the seed phase or the pre-seed phase. The valuation would either make or break the deal. Therefore, it is important to keep in mind a pre-determined price before valuation. Valuation is determined through specific metrics known as valuation metrics.

After knowing the actual value of the start-up, you can go ahead with quoting the values of investment. Pitching too high should always be backed up by evidence showing your start-up has value and such can be paid back. Quoting too low would make investors think, that your business cannot payback. Hence it is important to understand the importance of valuation for your business.

Factors which affect startup valuation

The following factors should be considered for startup valuation:

• Business Traction

Business traction is a crucial point while valuing your business. More traction would improve the chances for your business to secure additional funding. An entrepreneur must prove that the product or service is marketable to the public. Apart from this, an investor would also want to know, the strategy adopted by the product when introduced into the market. Factors under this would include the consumer interests in the products.

• Business Team

When founders promote the business during successive funding rounds, an investor would want to know the strengths and capabilities of the team as a whole. Typical start-ups would only comprise of founders with few individuals. The operational plan of the company has to be presented to the investor. 

• Diligence and Passion

A start-up has to show cause that they are passionate in what they do. This can easily be proved by founders. If an entrepreneur has designed a new product, then they must focus on proving that the product has some form of added value in the market. Demonstrating the efficacy of the product would indicate their diligence.

• Differentiation of Products

If you want to succeed with your products, then you must prove some form of competitive advantage is present in your products. Here the Unique Selling Proposition (USP) of the product must be emphasized and summarised to the investor.

The competitive advantage of your product can be explained to the investor using the geographical segmentation of the product or target customers for which your product is launched. As a founder, you would have to explain why your product is launched in the particular locality, its significance, and how it operates in the presence of competition. Using the business plan to provide examples would be suitable.

Conclusion

Valuation is a crucial element in the funding process. The value of a start-up is only derived from the metrics of valuation. Knowing the procedure and metrics which affect start-up valuation is crucial for a business.