You may have heard that valuing a startup is more of an art than a science. In contrast to the standard valuation factors for established companies, your startup may not have a long track record that can help you accurately predict future revenues, profits and cash flows. Possibly, there are few assets in place such as patents or equipment, and no reliable track of the liabilities. Therefore, traditional methods of valuation like Discounted Cash flow (DCF), Net Asset Value (NAV) etc. are no longer of use. Then valuation becomes a tradeoff between your investment offer and how your investors perceive your company’s future potential and risks.
The majority of entrepreneurs set their valuation too high, which in turn can make it extremely hard to deliver on investors' expectations.
There are a number of factors that affect the company valuation. Particularly, high growth affects the future value of a company positively.
Other factors, besides growth, you should consider are:
- Cash flow
- Strategic position and potential in sector
- The existence of patents or trademarks (very important)
- The team (most early stage investors focus on this only)
- Realistic expansion plans
- Traction (high growth in user base, increasing sales, press reports, etc.)
Besides the financial projections, the startup valuation will always be adjusted upwards or downwards based on factors like the strength of the management team, location of the business, the state of industry, market and economy.
Despite your company's profile, there are some general principles that entrepreneurs might follow when setting the valuation for their businesses:
- Apply several valuation methods. Use several assessment factors and valuation methods because no single factor or method is useful every time.
- Promote your strong sides. Concentrate on your strongest assets, expertise, skills and competences and develop a strategy for smoothing or improving the weaker ones.
- Underpromise and overdeliver. The majority of entrepreneurs are very excited about the future of their startups and, therefore, set high valuations. Sticking to very positive projections, entrepreneurs make it harder for themselves to deliver on these expectations. This can even become a problem when entrepreneurs plan to raise more funds in future. There is nothing worse than having to enter the next funding round at a lower valuation than previous rounds.
- Crowdfund not only for the money. Crowdfunding provides so much more than just financing. One of the greatest advantages is to get broad market exposure amongst potential customers and this is most easily achieved by a huge crowdfunding success. Additionally, your investors will become your biggest fans and help your business succeed by opening up doors via their networks and by acting as brand ambassadors for your company.