How to Value Your StartupDate: 28/02
Por: Marco De Biasi
It's commonly said that business valuation is more art than science. If this is true, then the practice of valuing a startup business is like a artist's job. Nevertheless, entrepreneurs need to put a value on their startups in order to raise money, and investors need to put a value on their investments to generate liquidity.
1. You are what the market says you are. If investors are telling you that your startup is worth $1 million, then that's what it's worth. You might think it's worth more, but if you're unable to raise money for your startup with a valuation above $1 million, then you'll have to accept the market valuation.
However, this isn't always true. If you raise money from relatives and friends rather than professional investors, it's possible that your company has been overvalued or undervalued (more likely, overvalued).
2. But you can also tell the market what you're worth. Although this might seem to contradict the point made above, it's possible to tell the market how to value your company. After all, if investors think your startup is worth $1 million, it's usually because of something you've told them. By definition, startups don't have a history of financial performance on which to base a valuation. Therefore, it's up to the entrepreneur to develop a process for valuing the company based on comparables and financial projections.
3. Compare. Search and finding out how much similar companies in your industry and geography are worth
4. Use Financial Projetctions: although it's notoriously difficult to forecast revenue at a startup, you'll need to do this to determine value-and eventually to defend your valuation
5. You're not really worth anything until you're profitable. If you're not profitable, your business probably isn't worth very much. That is, it doesn't have as much liquidity as it would have if it were profitable. Many businesses cannot be sold, since there aren't enough business buyers for every seller. Almost all unprofitable businesses cannot be sold for the same reason.
This makes valuation particularly challenging for a startup. Since young businesses take time to become profitable, the trick of valuing startups is to focus on the future. First, determine how many years it will take to be profitable. A business with a long road to profitability will usually be worth less than one with a quick path to profitability. Next, determine how much comparable companies have been valued at when they reached profitability. A company that could be worth $2 million at profitability will be worth some fraction of that number at the startup stage, based on factors such as the likelihood of success, the time frame to exit and the quality of the management team.
It's easy to enter the excitement of valuing your company at the highest amount possible and forget that you'll one day have to deliver on the expectations of investors. It's also tempting to adapt your business model to maximize startup valuation. Be careful about overvaluing your startup with faulty assumptions; it will only make your life more difficult-particularly if your investors have governance rights, such as positions on the company's board.
Entrepreneurs need to use creativity in valuing their startup businesses. If you want your startup to be a masterpiece, you'll need to use the right side of your brain as much as your left to determine value.