“What is your valuation?”
This is one of my opening inquiries as an angel investor when I meet with entrepreneurs about a prospective investment. Additionally, I frequently hear figures that are either too high or too low.
For instance, an entrepreneur who had recently received his degree from a prestigious business school informed me that his financial startup was worth $50 million. Two workers of the startup were full-time students at business schools. The founder had just a vague understanding of the go-to-market plan, no IP, and no MVP. The appraisal was based on variables that had no basis in reality, therefore I quickly called a stop to the conversation.
A different CEO I talked to have a product that will change the game, a substantial total available market (TAM), successful betas, some product sales, an amazing staff, and a well-thought-out go-to-market plan. I recommended the creator to reconsider her value because it was really low when she estimated the company was worth $500,000.
Many investors wouldn’t give a founder they had just met advice like this, but because the business had promise, I urged the founder to conduct her research again.
What is “valuation”?
The value of a startup shows how much it is now worth. The product or service’s stage of development, market proof of concept, the CEO and their team, valuations of competitors or startups with a similar business model, current business relationships with customers and key partners, and sales are all factors that go into the value.
While there is no perfect science to predicting how much money you’ll need in the future, you may check for trends in some areas and businesses.
Entrepreneurs frequently assign a value to their business when they seek funding or when they distribute shares to their staff, advisory board, and advisors. It’s crucial to accurately assess your business because if you overvalue it, investors can decide not to offer you any money.
Conversely, undervaluing your business implies either undervaluing what you have already accomplished or giving up a significant amount of stock for less money.
It’s more art than science
There isn’t a simple formula to use when determining your startup’s value. Valuations consider the characteristics of the product or service, business plans, and TAM because the majority of startups can’t actually demonstrate their commercial success on a broad scale.
You may have heard that valuation is more of an art than a science, and this is frequently true because startups sometimes lack precise data at the early stage and must contend with a number of risks that might alter the direction of the company. For evaluating early-stage firms, many conventional valuation techniques, such as discounted cash flow, are less effective. Investors must thus evaluate additional, less tangible elements.