Startup Valuation

Startup Valuation Checklist for Founders

Kurt GraverBusiness Start-up Advice

A startup’s valuation is the company’s estimated worth at its first sale or public offering. The valuation is determined by many factors, including the company’s stage of development, its revenues and profits, and the amount of capital it has raised.

A startup’s valuation is an essential indicator of its success and can be a crucial factor in attracting investors. The higher the valuation, the more attractive the company is to potential investors. However, it is essential to note that a high valuation is not always a good indicator of its business viability. A low valuation does not necessarily mean that a company is not profitable.

What factors influence startup valuation?

Determining the value of a startup is a difficult task, as many factors influence the valuation. Some of the most important factors include the stage of the company, its revenue and profits, its customer base, and the amount and quality of its intellectual property.

Company Stage

The stage of the company is important. Investors will value a company that has proved its concept and is operating more than a company still in its early stages of development.

Market Size & Growth Potential

Startups with high growth potential tend to have larger market sizes than those with lower growth potential. This means that startups with higher growth potential will likely generate more revenue than those with lower growth prospects.

Competitive Advantage.

Investors typically place a greater emphasis on the uniqueness of a product or service than on the size of the market. In addition to market size, another factor that influences valuation is a competitive advantage. If a startup has the edge over its competitors, investors will value it at a premium.

Management Team Composition

If you have a management team with all the skills and experience to drive the business forwards, this will not only increase the chances of securing investment it will increase the valuation of the business.

You should also consider how much equity each founder owns. Equity ownership is one of the critical determinants of a startup’s valuation. An investor might be willing to pay more for a startup with a more significant stake in the business because he believes that the founders will be able to make better decisions.

Financial Model

A financial model is a set of assumptions about future cash flows that an investor uses to determine whether to invest in a particular company. It helps investors understand the potential value of a company by estimating its expected revenue and expenses.

Revenue and profits are also important. A company generating a lot of revenue and making a profit will be worth more than a company that is not.

What are the most common valuation methods?

Investors determine the value of a startup in several ways. The most common valuation methods are:

1. The discounted cash flow approach looks at how much money the company is expected to make in the future and discounts that back to the present to come up with a valuation.

2. The market comparison method looks at what similar companies have been sold for to understand what a startup might be worth.

3. The earnings before interest, taxes, depreciation, and amortisation (EBITDA) approach looks at how much cash flow the company is generating and multiplies that by a multiple to come up with a valuation.

4. The revenue multiple approaches look at how much revenue the company is generating and multiplies that by a multiple to come up with a valuation.

How to Value A Startup

Startup valuation is a complex process that considers a variety of factors. Investors use a variety of methods to determine the value of a startup.

The first step is to assess your current stage of development and sales potential. This will give you a general idea of what your business is worth. 

The second step is to calculate your company’s tangible and intangible assets. This will help you determine what portion of your company is actually worth something.

While these two groups are closely linked, they are not the same. A small number of investors care about the business side of things and more about the financials. They want to know what the company is worth in dollars and cents and how that value is reflected in the stock price.

However, for most investors, the goal is always to flip the company for a profit. This requires understanding the company’s value regarding what people are willing to pay for it and how much they are willing to pay over what it would typically cost.

Understanding the difference between current assets and future assets.

Current assets are those that you are currently using to run your business. 

This includes cash in hand, inventory, accounts receivable, etc.

Future assets are the kind that will help your business grow in the future. These include stocks, bonds, patents, trademarks, etc.

Assessing Your Startups Assets

Start with your tangible assets. This means all the assets you can see – real estate, vehicles, equipment, furniture, etc.

Intangible assets are the kind that might not be physical things but things that are difficult to measure. This includes patents, brands, licenses, copyrights, customer relationships, etc.

The third step is to assess the market value of your company’s potential customers. This will help you determine how many potential customers will pay for your product.

The fourth step is to determine your company’s future growth. This is the most important part of the valuation process. You will need to analyse your company’s past, current and projected future growth. This will help you determine how much value your company has in the future.

The fifth step is to determine your company’s market value. This will help you calculate the equity you can offer investors and partners. Do some research and find out how much similar companies have raised in investment or have sold for.

Conclusion

In summary, the best way to determine your startup’s value is through a process of “mapping value”, which helps you identify assets, liabilities, and the cash flow of your business. Analyse your future sales plan for the next 2-3 years. Compare this to similar companies in your industry and determine how much investment they have raised and how much they were valued.

When you have done all of these steps, analyse your valuation methods and find out which one represents the best way to value your business. Sometimes it is best to do all the calculation methods and select an average valuation to pitch to investors.

Our business plan template package includes a financial pack with a valuation calculator. You can download this here.

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