The Entrepreneurs Guide to Start-up Valuation
How to make sure your million-dollar idea is worth a million dollars 💰
Figuring out how much a start-up is worth is an important part of fundraising, as it gives potential investors an idea of what your business might be worth at various stages of its life. But start-up valuation is far from simple: there are several metrics you need to account for, and several more subjective factors that contribute to what a business is worth.
At the end of the day, “your company is ultimately worth what you and your investors agree it’s worth”.
Despite the subjectivity, there are still frameworks that most investors and founders rely on to get reasonable valuations for start-ups. These frameworks examine different areas of the business and are used to arrive at a fairly accurate valuation. Over- or under-valuing your start-up can have negative consequences, so getting the numbers right is important.
In this article, we go through the different factors of start-up valuation and break down what you need to do to accurately value your business.
🚀Start with the cash
If your start-up is at the point where you have revenues, this is where you should start. Your balance sheet should give you an idea of the money coming into your business, as well as the value of your assets. This dollar figure can be used as a baseline for valuation as it tells you how much money is already in the business.
But as the saying goes, money isn’t everything. Maybe your business hasn’t started generating revenues yet, or perhaps your idea is simply worth more than the money moving through your accounts. Both of these are important reasons for looking beyond the balance sheet when valuing your start-up.
When it comes to subjective valuations, there are several methods investors might use.
📊The Berkus Method
The Berkus Method is a simple way to quickly value an early-stage start-up. It uses five factors to give a business a valuation between $500,000 and $2.5 million.
To use the Berus Method, take a look at your start-up and ask the following questions:
1. Do you have a sound idea?
2. Do you have a prototype?
3. Do you have a Quality Management team?
4. Do you have some strong strategic relationships?
5. Have you rolled out a product or do you have any sales?
For every question you answered ‘yes’ to, add $500,000. Of course, if your market is valued lower you might want to reduce that $500k to a lower figure — for example, if your revenues are in the thousands, not the hundreds of thousands, it might be worth scaling some of the numbers down.
📊Comparable Transactions Method
The Comparable Transactions Method derives valuations by looking at comparable businesses. While the Berkus method is good for a quick but rough evaluation, the Comparable Transactions Method gives a stronger measurement based on precedent.
To use this method, start by looking at your competitors. Databases like Crunchbase are good places to find data on start-ups, so begin by searching for a competitor.
For example, imagine you’re trying to build an online alcohol marketplace. You might look at a competitor like Drizly, which was recently acquired by Uber for $1.1 billion. If Drizly had 5 million users, that would mean that each user was worth about $220 when Drizly was acquired by Uber.
Now, look at your userbase. You’re doing a similar thing but only have 1,000 users. That means that your comparable value would be $220,000.
You might also want to look at revenue growth for similar companies. For example, if businesses in your sector usually see 5–10 times revenue growth year-on-year, you can use similar figures to project your revenue and values into the future. Be careful though: make sure you’re realistic with the comparisons you’re making.
📊Scorecard Valuation Method
This is another good way to value businesses before you have revenues. This again asks you to compare similar businesses, this time at their pre-money stages. You then break down the valuation into different categories and compare your business with theirs at that same stage.
The categories to consider are:
· Strength of the team: 0–30%
· Size of the opportunity: 0–25%
· Product or service: 0–15%
· Competitive environment: 0–10%
· Marketing, sales channels, and partnerships: 0–10%
· Need for additional investment: 0–5%
· Other: 0–5%
For example, say that a fictional competitor start-up had a pre-revenue valuation of $2 million. Take that valuation and break it into the different categories based on the percentages above. For example, in ‘strength of the team’, put down a value of 30%, or $600,000.
Next, research your competitor’s team and compare it to yours. Is your team as strong as theirs was when they received that valuation? Give yourself 100% of the $600,000 in that category. Is your team half as strong? Value yourself at $300,000 instead. Is your team stronger? Try and estimate how much stronger and value yourself over $600,000 instead.
Repeat this process for all other categories.
Ask for help
It’s important to evaluate your start-up with unclouded judgment, which can be difficult if you’ve been close to your project for a long time. Taking a step back and trying to be objective is important, and it often helps to get the opinion of a trusted advisor or Angel investor wherever you can.
As an incubator and accelerator, Adaverse can provide you with the tools and advice you need to accurately value your start-up to help you attract investors. If you’ve got an idea, or have even started growing your business, get in touch with us today.
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