How to Value your Startup!

I have been asked many times, how do I value my startup? I have for some time now used my own variation of the Berkus Valuation Method, the Ian Brown Bottom-up Some-of-Parts Method. With this article I hope to give an improved method for valuing a startup, that is pre-revenue, and that creates a win-win for the entrepreneur, and the founding team, and the early stage investor. 

So, here is my method.

The Ian Brown Bottom-up Some-of-Parts Method

The method requires you to assign a value between $0 and $250,000 to each of the following eight categories, with the total valuation being the sum of those. To determine the value you assign to each category (1 to 8 below), follow this simple guide: Give your startup a zero score if you have not yet done the work (for whatever reason); give your startup a $125,000 score if you have done some of the work; and give your startup a $250,000 score if you have done all the work and the evidence is compelling. Obviously, you can use gradations in between the $0, $125,000 and $250,000.

Category 1. A validated problem that is significant and growing: The team has gathered evidence to demonstrate there is a solid problem-solution fit, and finding a solution is a priority for the customer, and the problem has a clear annual growth. Hint: Do this by interviewing 25, 50 or 100 potential customers (see Value Proposition Design, Alex Osterwalder, Yves Pigneur, et al).

Category 2. The innovators and early adopters have been identified and are accessible: The team has gathered evidence to demonstrate a solid understanding of those wanting / willing to innovate and/or early adopters, be the first customers. Additionally, the team has developed customer centric language that will resonate with these customers. Hint: The team can show that they have a deep understanding of the innovators and early adopters that will be the first customers / first purchasers of the product that will enable early sales in the business. 

Category 3. You have developed a simple solution that has been validated: The team has gathered evidence to demonstrate there is a solid product-market fit and a potential customer base with the capacity to purchase. Hint: Do more interviews with potential customers (see Value Proposition Design, Alex Osterwalder, Yves Pigneur, et al).

Category 4. The team has a strategic and sustainable competitive advantage over the competition: The team has either a strategy based on trade secrets, intellectual property protection or has a plan to develop a ring fencing of the opportunity. Hint: Build a strategy that is more than just first mover advantage.

Category 5. The team has the skills, knowledge, experience and networks to turn the idea into impact: The team needs to be formed in a way that ensures they have all the skills, knowledge, experience and networks to succeed. Ideally the team should have been set up to be a high-performance team that is capable of delivering all of the milestones in the plan. Hint: It is essential to invest time in building the right team and / or calling out the gaps and demonstrating you have a plan to fill the gaps.

Category 6. The business is scaleable: The business model needs to include processes that, whilst maybe manual at the very beginning, can easily be converted into a scalable process. Hint: Opportunities for leveraging digital business models and so on.

Category 7. There is a win-win pre-money valuation and fund raise metrics: The pitch for capital needs to be pitched at a level that enables investors to come in and believe that they are getting a good deal and that subsequent rounds of capital invested into the company will be at a higher rate on each investment round. Basically, you need to design the first capital rounds, with subsequent capital rounds in mind. Hint: In the perfect scenario this would be designed without any chance of a down round in the journey. 

Category 8. There has been great growth for early investors already invested: It is important to get good solid growth investors into your stock in an earlier round so that subsequent investors can see that the cap table includes people with the networks and a track record for growing great businesses. Hint: Be flexible on investment terms with the right investor that brings significant skills, knowledge, experience and networks.

In my mind, creating a win-win for the entrepreneur, and the founding team, and the early stage investor, is achieved by being as pragmatic as possible about arriving at evidence-based valuations for each component part and trying to make sure the total valuation is strong but modest. At the end of the day we want to make sure that the entrepreneur and founding team are rewarded for their management of risk and for the value they have created and that the investors are rewarded for taking risk, with good due diligence, and putting money on the table. Most importantly of all, we want to make sure that wherever possible all subsequent funding rounds have a good uplift to enable the creation of a capital growth history, as this capital growth history will enable a solid footing for future transactions. This will create a win-win for all parties involved.

Ian