Valuation of your startup and raising funds!

From the world of startup incubators to the glamour of the New York Stock Exchange, startup fundraising is fuelled by a diverse array of investors. From philanthropic ex-founders to massive financial institutions, your choice of investor has far-reaching consequences for the capital, guidance and direction you can expect from each funding round.

Use crowdfunding to increase your startup's valuation.

Crowdfunding is one of the newer ways of funding a startup that has been gaining a lot of popularity?lately. It’s like taking a loan, pre-order, contribution or investment from more than?one person at the same time.

Crowdfunding: Funding your business idea through small investments from a large number of people.

Crowdfunding is evolving. This type of fundraising is in its infancy, but as more companies facilitate crowdfunded investment, more options appear: affording founders never-before-seen flexibility to raise capital in a way that suits them. Crowdfunding has become widespread with startups in the last ten years as an alternative way of raising funds. There are two main types of crowdfunding: rewards-based, and equity-based.

However, you should improvise your startup valuation so that more and more investors show interest in your startup business. Crowdfunding campaigns will also often present a roadmap for development based on the amount raised (in other words: the more money raised, the more features the product will have). These incentives and the roadmap help encourage more significant contributions.

Entrepreneurs who already have had some level of familiarity with crowdfunding are likely to be more willing to be a guinea pig for equity crowdfunding. “Firms who have been successful in other forms of crowdfunding might well explore whether these options make sense for them,” says Richard Swart, the chief strategy officer of equity crowdfunding event platform NextGen Crowdfunding.

Apply for angel investors to raise capital.

Angel investors provide capital, connections and experience typically in a syndicate, and here’s how to attract them to your startup. Angel investors?are high-wealth individuals who provide startup capital to entrepreneurs in exchange for a percentage of equity in the company.

This “seed” money is almost always out of pocket and ranges from a few thousand to a couple hundred thousand or more. Angels typically take on mentor or advisor roles in the company as well, so it's important that they're knowledgeable about your industry.?Angel groups?consist of multiple angel investors pooling their money together to invest a significantly larger amount in multiple startups. You can research accredited investors at the?Angel Capital Association;?be sure to look for those in your own region as well as the field.

These investors are individuals with surplus cash and a keen interest to invest?in upcoming startups. They also work in groups of networks to collectively screen the proposals?before investing.?They can also offer mentoring or advice alongside capital. Raising money from angel investors might be the path most startups are following in early-stage raising, they can invest anything between $100k to $1M. They take equity in return and they want to invest in the new "future" unicorn. Pitching and connecting with angel investors is challenging because there’s fierce competition going on and there are more ideas/entrepreneurs than there are angel investors. It is still easier to reach out to angel investors than a VC or a micro VC because those funding institutions focus more on startups that are in the growth stage and where the risk is somehow mitigated. Economic situations also play an important role as investing in startups is one of the options for an angel investor. If the stock market is doing well, then they would rather invest in the stock market which offers a more safe investment although with less return.

If you’re still in the pre-revenue phase, angel investors may be your best option?for raising money. While Angels are typically high-net-worth, accredited investors who buy equity stakes in fast-growing start-ups, In recent years, however, less-affluent investors have begun to participate in angel investing via equity-crowdfunding platforms — such as SeedInvest, StartEngine and Republic — although certain federally imposed limits still apply to them. Before you approach an angel investor, you should have a pitch and a solid business plan at your fingertips. Apart from providing capital, their know-how will help shape your business’s success. Angel investors have helped to start up many prominent companies, including Google, Yahoo and Alibaba. This alternative form of investing generally occurs in a company’s early stages of growth, with investors expecting a upto 30%?equity.?They prefer to take more risks in investment for higher returns.

Communicate your startup's value to potential investors.

Investors see value in lots of different aspects of a startup. In essence, early investors are betting on the ability of your startup to return 20-30x their initial investment, based on the risk to such early-stage capital. A large user network (and revenue potential) is a great place to start. But there are several steps to take from proving that a market exists to showing that there is a potential to make a profit in that space.

Valuing your startup is much more a matter of negotiation with your investor than a mathematical exercise. A successful outcome depends upon highlighting your value drivers and risk mitigants. If you research and build a sensible valuation argument based on industry-accepted rules of thumb, all should be well, and valuation will not be a sticking point.

In a pitch situation, investors will invariably question your valuation, so being able to talk them through your process is vital. Even if they disagree with you, being able to demonstrate a solid approach is going to serve you well.

Valuation is driven by the strength of your value creation potential, the opportunity for an attractive return on investment, and your ability to mitigate the risk factors by proving the uniqueness of your business proposition and your strengths as a team. Risk vs reward.

Create a marketing strategy to attract investors and customers.

Present your marketing plan to investors and show them the different channels you plan to use to increase your visibility in the market. In addition, having a marketing strategy also means getting your product/service advertised to a potential customer in the best possible way. That means not trying to sell all the time and telling people what they should and shouldn’t do, but rather delivering value to people with what you provide and recommend solutions.

In any area, having a well-defined marketing strategy is crucial for your business to grow and gain traction as widely as possible. If you need to attract more customers, the first thing you need to do, obviously, is reaching them. Thus, using online marketing to your advantage is key.

That’s why you need to understand and plan the various forms to advertise your brand to attract audiences from various communication channels. The important thing about this type of marketing strategy is that you can identify partners that can help you attract more customers and for whom you can do the same. Thus, there will be an increase in both audiences.

Clearly, the best marketing for a product is one that will sell what you offer to your audience. Marketing is about identifying your target market, understanding the needs of people in that market, and communicating how your company can solve their problems. Typically, companies do this to find potential customers by running multiple tests for at least 6 months.

What methods are available for valuing a startup?

A startup valuation is an attempt to determine the value of a startup. This startup valuation method relies on several elements. The main ones are: calculating how much it would cost to build a similar startup from scratch. It looks at physical assets to see their fair market value.?

To determine a startup’s value, the Scorecard Valuation Method looks at the average pre-money valuation of neighbouring startups in the same geographical location and business sector as the startup that’s looking to be valued.

The difficult portion of this method is finding an objective point of reference to measure each component. Starting with comparable methods, like the Scorecard Method or Comparable Transactions Approach, may help. The Income Approach, The Market Approach, or the Asset Approach.

But often, the answer to which method to choose is based on weighing the pros and cons, along with all of the gathered information on the business being valued. While there is no “one-sized fit all” solution to choosing which method to use, valuators often use their experience and specific guidelines.

How to Jumpstart your startup's valuation?

Start with an initial valuation based on one of the methods mentioned here. Then, increase or decrease that monetary value to multiples of $250,000 based on risks affecting your business. So, there you have a rundown of the best valuation methods for pre-revenue startups.

Once you have started working on concretizing and validating your idea you can start working on evaluating it based on the early customers’ rate and the revenues. That valuation should be into consideration the fact that the startup is still in an early stage (an early-stage startup generating $10k a month might be considered “high-value”. It is also important to note the cost of sales, the cost of acquiring new customers and the net income generated (margins of sales).

Those are the first steps of figuring out how to value a startup: Think of value beyond monetary terms and then think explicitly about the monetary value of similar companies. But, like so many things in the startup world, there’s more than one way to figure out startup valuation for pre-revenue startups or early-stage startups.

As a startup founder, you need a valuation estimate you can justify to potential investors and trust for any other reason. A precise valuation helps you craft your long-term capital raising strategy and keep your funding requests in perspective.