Setting a valuation for an early-stage startup looking to raise money is tough. There’s no one right answer or formula to rely on, yet plenty of advice — some of which can lead you in the wrong direction.
For starters, do you know where you stand in relation to other companies? In regards to your market? Should you rethink your magic number if you still have no revenue? You need to consider all these questions and more. To help, I asked eight founders from YEC the following:
What is one thing I should be thinking about as I come up with a valuation for my early-stage tech startup?
Their best answers are below:
1. Whether or Not You Want a Lawyer
A valuation can have long-term consequences for your business, so make sure you have a lawyer who can explain the benefits and risks of seeking a valuation at a specific time. A lawyer can also help you negotiate to make sure you get the most favorable valuation for your business. – Basha Rubin, Priori Legal
2. How Much Investors Will Pay
The valuation is whatever investors will pay. That said, the market is the most practical determinant, though intangibles like track record and past successes of the founders definitely play a role. In addition to looking at comparables to come up with a valuation estimate, you can also try a bottom-up approach in which you value the individual pieces of your business to figure out an overall valuation range. –David Ehrenberg, Early Growth Financial Services
3. What Your Entire Business Lifecycle Looks Like
It’s important that you model the entire business lifecycle and the required rounds of investment to get through that lifecycle early on. You can then work backward to calculate how much money you will need at each stage and how much dilution will be required to get through that many rounds. With all this in mind, you can back into how much the company needs to be valued at during this early round. If you have the entire lifecycle laid out with reasonable assumptions that are not wildly out of line with the market, you can focus on landing the best investor for that vision. – Brennan White, Cortex
4. How Comparable Companies Are Valued
Proper financial valuation techniques do not work as well when you are looking at a company without much revenue or traction, so it does not make sense to build a traditional financial model. If you are planning on doing a priced round, then look at standards for seed and Series A valuations of similar or comparable companies. – Randy Rayess, VenturePact
5. Whether or Not It’s Too Early to Raise
While raising money can be a complicated circus, the underlying decision-making process should be relatively simple: How much money do you need right now, and how much of the company are you willing to give up? Valuation is a moving target that depends on many things, chiefly: How much traction does your company have? Do you have users, revenue and a path to profitability? The more you can say yes to these three items, the easier it will be to command a higher valuation. So if possible, don’t rush to fundraise. Raise too early and you will give away the store. – Joel Holland, Video Blocks
6. How Many Years Earnings Are Expected to Continue
A key element in calculating the valuation of a business is the number of years that your current (or expected) earnings will continue in your educated evaluation. Any potential buyers or investors will want to know what kind of revenue you will be making with your startup in the coming years, and when these numbers will increase, decrease or change at all. By researching the economy, consumer confidence and even predicted trends of upcoming years, you can make an estimate on the number of years earnings are expected to continue, so that the market can consider their purchase in the long term. – Miles Jennings, Recruiter.com
7. The Valuation Range Based on the Quality of Investor
Considering how helpful your investor will be — in terms of distribution, signaling for future investors, marketing and general support — should shape how wed you are to your valuation. If an investor is someone who is going to do more than write a check because of their time or their stature, you may consider having a slightly lower valuation than for someone who is only writing a check. – Kofi Kankam,Admit.me
8. How Big Your Market Is
Seed-stage investors are most concerned with the market opportunity. How big can this company eventually be? As Fred Wilson says in his blog avc.com, startup investing follows a “power law” where a few companies drive almost all of the returns. These companies are worth billions because they dominate a large market. If you are in a small market, there is a cap on how big you can be, even if you execute perfectly. – Sathvik Tantry, FormSwift
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