“Price is what you pay. Value is what you get.”- Warren Buffet
The word ‘valuation’ comes from ‘value’ hence, it is important for entrepreneurs to understand that the start-up valuation is not only a big number but also a promise that you make to the investor. This figure is a difficult one to arrive at. Calculating it is more of an art rather than a science. Since it involves forecasting and speculation, people use different ways to conclude on the valuation.
Here are some points that will help you understand the nuances behind this concept and use it to your advantage:
- The market decides your worth–
Your start-up is worth what your investors think it is. This number might different from what you think it should be, but entrepreneurs need to accept what the market indicates. For example, if your investor suggests the value is $5 million, and if you have more than that in terms of receivables, liquid assets or sweat equity, you will have to accept the investor’s value.
If you raise funding from known sources – friends and family, you might be able to have a higher valuation for the business. But that doesn’t mean it becomes a benchmark for future value paid by investors.
- You can also prove your worth–
Start-up valuation is considered a creative process because your worth depends on what the investor knows about you. Look out for new and interesting ways to prove your point and justify the hole that you are trying to fill in the marketplace.
Comparison: This can be a useful tool to put across your projections to the angel investors. You can compare your business with competitors of similar size and business. There are various sites online that will help you get an idea of what the other businesses are currently valued at.
Financial Projections: Since there is no historical data involved, most of your valuation depends on these projections. Make sure you don’t become over-ambitious while working on this front. Remember. It is the value that you are promising to the investor. You should be able to provide the maximum return on their investment.
- Unprofitable businesses are not really worth anything–
This is the era of start-ups and investors have plenty of variety to choose from. Very few businesses actually make the cut. One major factor of elimination is unprofitability. Investors are often not in the favour of betting on unhealthy businesses. If you are not already profitable, you must have a compelling roadmap to getting there in order to win over the confidence of your investors. Mostly start-ups lose out on funding due this criterion.
If you have a start-up of your own or work for one, this is something you need to be consciously aware of.
Define a roadmap, aim at profitability, make the best impression, stand out from the crowd and impress the business angels to get the highest possible value for your start-up!