How to do Valuation of a Startup from a Founders point of View?

As any founder, you would not have a clear idea of where to start. If you have an idea and want to raise capital for the same, then you need to first determine the value of your start-up. 

Startup Valuation- Crucial Essence of Funding

It is important to determine the real value of your startup. Many investors say that startup valuation is “more of an art rather than a science”. This would be true even in the case where there is very less data for your startup to analyse. Every start-up would have some price and this price is known as the net worth. Determining the real value of your startup would have to be realistic. You also have to make sure that such values are in lines with that provided by the investors.

Startup Valuation- Win-Win Scenario

To achieve valuation there are few points to consider. The following are points to be considered before going to an investor with your idea:

• Financial Projections and Forecasts

Forecasting starts with finance and predictions. As an early-stage start-up, it would not be easy to forecast the financials of your startup. In order to carry out forecasting, you need to have some prior knowledge on financial projections which affects a business. Right from the beginning, you need to think like an investor. A Venture Capitalist or Angel Investor would have in line 100 such start-ups to invest for. Your start-up must intrigue the investor. You must convince them that your start-up would be able to deliver 10 times the amount of investment.

• Valuation is more of an Art than a Science

As mentioned earlier, investors consider valuation as a mere art, rather than a science. While documenting an idea in the books is a mere idea, unless and until it is put forth in action. Investors are more interested in your idea and your potential to achieve the same. A company which has no value, can make value by showing potential to investors that the business is viable.

• Carrying Out Diligence

Doing your homework is important when going for startup valuation. In order to implement this, you need to compare similar companies in your domain. You can carry out a benchmarking exercise to compare companies in similar sectors. If you are planning to launch your product in a particular geographical area, then you have to analyse the companies present in this area. Then you can compare similar companies and get an idea on the value of your start-up.

This is one of the easiest ways to find the value of your business. Your business idea may fetch a lot of money, but the crucial task to carry out is securing funding from investors. The main goal here is to secure some value for your business. Having realistic numbers of other businesses is crucial evidence for valuing your startup.

Another way to know the value of competitors is by researching and checking websites such as BusinessesForSale.com., BusinessMart.com. or DealStream.com. By carrying out this, you can determine the real value of your competitors business. 

Keep your accountants and lawyers also informed about your plans, as they will be useful in determining the value of your start-up. As a beginner for startup valuation, your advisors such as lawyers and chartered accountants would be useful. Ensure that you seek advice from both of them as you need realistic valuation figures.

• Advisors

As mentioned above, your financial advisor would be of help to assist you with the process of valuing your startup. However, if you are struggling with financial projections, you can make use a financial advisor. To begin with, you can find out what is happening in the financial markets. An example of this would be the recent mergers and acquisitions (M & A) taking place in your line of business. Through this, you can find out the real value of your start-up. Knowing the value of your start-up is crucial to understand what amount investors are willing to shell out.

• Doing the Economics

By doing your homework, you will understand the market and the competitors. You will also know whether your product would be successful. The principles of demand and supply also apply here. If there is less supply of a product, then demand would be more. If there is new technology introduced by your startup, then more investors would be willing to fund this technology.

However, practically not all start-ups are in demand. As a founder of the start-up you have to generate demand for your product. You also have to show other investors that the products offered by your start-up is in demand. An investor willing to invest in your start-up should know that, the products offered by your startup is in demand. 

• Future Profitability

Determining the future profitability of your start-up is a good start. For example, this can be easily carried out if your business is generating revenue. However, if you are starting from scratch, it would be a hard task to achieve. A few things to consider is by asking the following questions:

• Who are the current competitors in the market providing services in similar domain?
• How does your start-up match with the competition?
• What is the financial projections of your start-up post five years?

The above questions would help you determine the scalability and future profitability of your start-up.

• Sector Wise Valuation

Another thing to consider is that valuation is different for every business. For example, valuing an e-commerce start-up would be different from valuing a technology start-up. When carrying out startup valuation, the above factors have to be thoroughly researched. As a rule of thumb, investors would classify start-ups based on each stage. Therefore, the higher stage you are, more investment would flow.

• Level of Experience

Investors typically classify the founder based on the level of scalability and business operations. If you are a newbie with an interesting idea, then investors may be willing to provide funding. However, the range of funding may be less based on the amount of exposure you have in business.

• Road Map for Success

When you are presenting your business idea to an investor, they would ask you one question “Why do you require funding”? You have to provide conclusive evidence between your idea and its success in the market. Here you need to show that you have done your homework. For example, you can provide a demonstration of your product. An investor willing to fund your business would want to know, whether it is worthwhile to venture. Demonstrating your prototype would help provide clarity.

Key Takeaways

Every founder would ask themselves, “how to do valuation of a startup or how to calculate startup valuation?” In order to carry out a valuation for your start-up, you first have to think like an investor. Of course, you have to show conclusive evidence to the investor about the products offered by your business. Startup valuation may be a daunting task, however following the above article should clear any doubts.