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Early-Stage Startup Valuation Explained

March 9, 2021
Company Building

It’s early days, but you have a big market potential, an exciting product, a determined team and investors are lining up to meet you. But, how much is your business really worth? Your revenue figures and user metrics are not yet robust enough to drive your value, so what’s the right amount?

As you navigate this uncertainty, the most important thing to remember is that valuations are not set in stone, but are negotiated. Especially at a seed stage, you are entering into a dialogue with potential investors and will emerge (hopefully) on the other side with a set of investment terms, including the valuation for your company. The right level of preparation should help you navigate those negotiations. Watch the full video here:

Here are a few things you can consider:

Do your homework

In order to attract venture capital, you’ll need to build a compelling case for why there is a strong potential for you to win in your respective space. Investors will need to understand the total size of your addressable market and why you (and your team) are well-positioned to have long-term sustainable growth, despite competition. That means you’ll need to have a firm grasp of the market dynamics and why your strategic approach will ultimately succeed. There are tons of guides and tips online to building pitch decks, but keep in mind that reading slides is very different to hearing the pitch live, so keep that in mind for anything that you’re emailing.

Needless to say, being well prepared for these discussions and presenting your investment opportunity in a coherent way will attract the smartest money to your business.

Remember, it is a negotiation

You should have a good understanding of public companies that are similar to your business, even if it's only the business model which is the same, as that will give you a good indication of how companies at scale will be valued by investors. It could be multiples of revenue or EBITDA or other metrics. Research the region and try to gather information on other private companies and who they raised capital from and how their rounds were priced, if it's public information. Speak to other founders or folks in the start-up community. Arm yourself with as much knowledge of where similar companies are trading so that you have a basis for your initial valuation expectations. However, ultimately, you’re unique and your business is not identical to any other, so market comparables are a guide, not an absolute.

For the investors it is about how much money they are willing to invest in your idea and what kind of ownership is fair for that level of investment for the risk. Remember that transparency builds trust so don’t play your cards too close to your chest. The stronger their confidence in your strategy and ability to execute it, the more risk they may be willing to accept.

Keep in mind, you’ll spend the longest period of time with your seed-stage investors, so try to find long-term partners who also want to provide more than just capital. Operational expertise, network connectivity, business development, talent recruitment, or even cheerleading — there are lots of ways for your investors to add value along the way. This is the beginning of a tough journey along which you will need their advice as well as their funding.

Plan your capital, like you project your P&L

Founders always tend to project out their P&L, but often don’t link future cash flow assumptions back to their capitalization table to predict when that next round is needed to keep the growth going.

Plan out your dilution over time. Try to think at least one or two rounds ahead, projecting where the financials will be at those funding stages.

A lot can happen between the seed and Series A, much less the Series B. You might take longer to prove your product-market fit, it might be harder than anticipated to convert customers or build up your team, so understanding your runway is critical to timing your next fundraise.

Also, be thoughtful about how value can grow and the drivers that should underpin your valuation.

Don’t price the business too high early on or it could be hard to catch up operationally. If you push too hard on the seed round valuation and you fail to reach the ambitious growth targets, then it can have a massive impact when you have to next raise capital.

So, accurately determine the length of the runway you are asking for, have a realistic view of the size of your business at the end of the ‘runway’ period.

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In short, every business is unique so one size does not fit all when it comes to valuation. You need to demonstrate rigor, tenacity & flexibility so that you emerge from negotiations with both the capital & commitment of a great team of investors.

Watch the full video here

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