For entrepreneurs, company valuation is a topic that produces a lot of anxiety, raises many questions, and elicits a lot of strong feelings. But let’s stop for a moment. Why are values significant in the first place? They are the prices that an investor, acquirer, or the general public (in the case of an IPO) is willing to pay for your company. They’re based on intangibles like the caliber of your founding team, the size of your market potential, and how hot the industry you’re targeting is. Aside from deciding on topics like how much equity you’ll give up in exchange for investment, you’ll also need to figure out how much money you’ll need. Also, how much long-term value you can take from your company. Startup valuation is essential for showcasing how appealing your company is to investors and how you compare to your competitors.
VCs want to hit it out of the park with their investments. Five of every ten investments made by a VC will fail, two will break even, and one to two will be home runs. As a result, VCs place a premium on the scale of the potential.
Another point to consider: relatively few venture capitalists are visionaries. The majority of VCs are herd-like “rabid followers.” In other words, whether your sector is in or out of favor when it comes to value timing is critical.
Here’s some simple tips to raise the value of your startup:
- Have a successful departure in the past. This will improve your chances of obtaining finance and raise it at a greater startup valuation.
2. Carefully choose your team. You should always employ cautiously, but you should pick your personnel much more carefully if you want to acquire equity capital. Choose people who are not just experts in their profession but also leaders in their field.
3. Choose milestones that are important to you. If you meet your goals, milestone financing enhances the value of your firm with each fundraising round. They might be focused on technical development (beta versions or prototypes of your product), consumer traction, or team objectives, but they should be unique to your company.
4. Think about how you’re going to define your milestones. You’ll lose credibility if you pick ones that you won’t be able to hit. After defining them, create a budget based on the expenditures you estimate to incur to attain them. This will determine the value of your request. To accommodate for unanticipated speed bumps or delays, always add a 25% fudge factor.
5. Cut down on the quantity of energy you expend. Even if traction means different things to different individuals, investors will always check at your burn rate vs. your growth rate. When considering extending revenue-based investment to businesses, Lighter Capital, for example, looks for burn rates of more than six months.
6. Negotiate the terms of your fundraiser. The more people interested in your business, the greater your startup valuation will be. Allow VCs to come up with numbers initially as part of your bargaining technique, then play investors off each other. Don’t make any decisions until you have all the facts and know how much you can receive for your business.
Because of the idea of dilution, which states that the more you raise, the more stock you give up, you want to have the highest value possible, but you must balance it with your future fundraising plans to avoid arriving at a price that the market cannot support.