Valuations and Other Mysteries: Top Five Factors in Valuing a Startup
By Alex Day
You have your company formed and you are ready to raise the money. So how much is that new company worth? This is about as easy to answer as how many angels can dance on the head of a pin. There are many, many factors that go into this. But the ultimate answer is that your company is worth, what you can get someone to pay you for it.
Below are the five top factors that will influence the valuation of your company.
1. You - How much experience do you have?
2. Your team - How much experience does your team have?
3. Your idea - Does it really meet a market need?
4. Market potential - What is the size of the market and how much of the market can you capture?
5. How much money and how much time do you need to get to cash flow positive?
Some of the factors that an investor will look at include whether or not you have started a business before. If this is your first time, then there will be a discount factored into that. If you have had a business that had moderate success or even failed, you will get a bump in value for that experience. If you have had a successful exit, then you will get a much higher valuation. Some of the other factors include: what the market potential is; whether there is IP (intellectual property) with the company and at what stage the IP is; whether you have a prototype, or need to build one; and whether you have sales. If you have existing sales then this could put you way ahead of the game.
Some of the other issues include how much money you are seeking and how much money you anticipate it will take to fully commercialize the product. If it can be commercialized for thousands of dollars as opposed to millions of dollars, this will have an impact. The size of the potential market is also a major consideration for what your value will be.
The amount of money you raise is going to determine how much of the company you are going to have to give up. If you need to raise $2 million to get started, and the investors only value your company at a $1 million pre-money valuation, then you will be giving up control of the company to get your $2 million (click here to learn more about pre-money, versus post-money valuations). This is a major issue between the "idea guy" and the investor. The investor is always worried that the idea guy is crazy (and he/she often is). The Idea Guy is worried that the Investor will take the company in a direction that will destroy their vision (and he/she often will). So there is a tight balance between the give and take between the investor and the inventor.
I often suggest that you look at raising the smallest amount of money you can. You set realistic goals for this money, you accomplish these goals and now you have increased the value of your company. It is likely you will have to raise more money, but if you have set the proper expectations with your investors and met or exceeded those expectations, you are likely going to be... continue reading