Valuation: Proven Way to Correctly Valuate Your Startup

You'd be extremely lucky if you hatched a great business idea today and got all the capital you need in a month. Usually, startups are tales of late nights in the garage-turned-office, dozens of coffee gulps, back-breaking research work, and hundreds of rejection pitches from potential investors. In fact, according to Investopedia, working capital is one of the greatest financial hurdles, almost all businesses face. That’s where valuation comes into play.

Let's get a little more realistic. This year has been probably the hardest for thriving businesses, let alone struggling startups. Every multi-billion business today was once a startup. It may not seem like it when they've grown into a renowned brand, but the founders relate to your desperation. They didn't give up, and neither should you. Every startup, however little, deserves a lease of life.

So how do you get investors without getting the raw end of the deal? Valuating your business! You need to think about crucial determinants in order to have a picture of valuation and how it ties to getting investors. Your startup's value is largely determined by existing market forces in the industry in question, the availability of money, the number of recently failed businesses in the sector, an investor's preparedness to part with money for a contract, and how hard you work to get funds. 

Here are some insightful tips that will help you get your startup off the ground:

Do In-Depth Market Research

Think of research as building a foundation for your business. When done properly, research is like studying for the right topics before an examination. Other reasons for research include:

• Spotting your target market: You need to ensure that the services you seek to offer are actually needed. Businesses survive on sales and clientele. Without customers, it is impossible to turn your idea into money. Discovering your target market also reveals the best locations for your startup and likely investors.
• To Know How to Make Sales: This also touches on where you advertise. If your customers are online, use social media to reach them. Spending habits also come in handy when deciding how you'll sell your goods or offer services.
• To compare and Contrast Value with other businesses: Find out how much your competitors are worth, especially those in the same locality as you. Numerous online sites are offering free information about company market values. You may not understand what the figures mean for your startup at face value. However, if you have a friend in the legal fraternity or accountancy, ask them to help you digest the numbers. I've found friends to be especially helpful when looking for legal advice. They won't trick you deliberately.
• Forecasting Revenue: At first, any prediction about revenue will seem unfounded or perfect. However, you have to be realistic according to your business type. If you over-project or under-project, you won't be able to defend your business valuation to investors. For example, it would be ludicrous to estimate your food truck business at hundreds of dollars. It would also be insane for you to estimate a clothes store at only a few thousand dollars. 

Your Profit Determines Investor Interest

Are you making a profit yet? If not, it would be hard for any investor to consider chipping in. Profit-making increases your chances of landing an investor. But if all businesses were dismissed over their inability to make a profit in the beginning, we'd still be in the dark ages. It is a mistake to value your business at zero because you're yet to make any money. 

Start by identifying the time frame between now and when you'll begin making tangible profits. Some startups are set to make money sooner than others. A clothes store may not make a profit as quickly as a food truck. People eat all the time but don't buy clothes as much. After determining your profit-making path, compare your business's value to the amount your competitors were valued at when they began. A business worth millions now was only worth about 1/8th or less of that as a startup. This amount was arrived at by considering the market and management's skills and abilities.

Remember to keep your valuation logical even if you're already making a profit. Many investors may take up more than a 50% stake in your business. This gives them more decision-making rights than you. An overvaluation will highly complicate matters if this is the case.

Use Different Valuation Methods

There are several proven mathematical methods to value your startup. They include:

1. Cost-Duplicate

In simple terms, this model of valuation assesses how much you would spend to start your business again from zero. For a Software as a Service company (SaaS) or any other company in the IT software business, it would also include time taken to create a product. This method, however, doesn't factor in possible growth, expected profits, or the value of the business's reputation. This method is the most likely to undervalue your startup.

2. Discounted Cash Flow

With this method, you estimate the amount of money your business will generate over a long time. The estimation, coupled with expected returns on your investment, enables you to value your startup. You can hire an analyst to do it for you for a more credible valuation.

3. Score Card

This is basically a comparison between your startup and others in your domain. Analysts consider the power of the existing human resource, such as their expertise, the quality of the goods or services on offer, and the competitors. At the end of the valuation, analysts determine your level of quality as opposed to your competitors. If your quality appears to be better, the valuation of your startup goes a notch higher.

The Key Takeaway

As much as spending as little as possible is a plus for your startup, in the beginning, don't underplay the value of professional advice. Go to friends or acquaintances for help in as many areas as you can. Each valuation method has advantages and disadvantages too. It won't hurt to try out all of them and see the disparities. Remember, investors are already masters in your field. They'll catch an overvaluation quickly, ruining your chances of getting a good investor.

Are you a startup that needs great advice and some startup capital to sell your idea out there? Relax, your capital problems are now over. At StartupNV, we care more about your business's success, and we will hold your hand till your company rises onto its feet. Our incubator accelerator program gives you all the tools you need (including capital!) to get started. Feel free to contact us today or call us on 775-393-9701, and we will be more than willing to assist!