The most daunting question that a startup has to face is regarding the value of its startup. This where they don't know whether to go over the top or play safe. This is typically in conjunction with an upcoming financing or investment offer.
According to the Industry experts - Just like everything, your startup is only worth what somebody is willing to pay for it. The method and techniques employed by one investor in one industry can be very different from the ones applied by another buyer in another industry.
Related reading - 5 Top Questions VCs May Ask Startups
So, before you approach investors with valuation expectations, make sure you have studied the valuations achieved in recent financings or Merger & Acquisition transactions in your industry. If you feel you do not have access to relevant valuation statistics for your industry, engage a financial advisor that can assist you.
Anyways, to help everyone related to startups have better valuation of their startups, we at IndianWeb2 have complied a list of six driving forces that drives your startup's value in the industry.
The Industry to which your startup belongs makes a huge difference to its valuation. Each industry has different valuation methodologies at play when compared to another industry. For example, a biotech business venture can be expected to be priced at a much higher valuation when compared to another family restaurant in the market.
Hence, before you start the long process of approaching investors for valuation, make sure you have done a thorough research of the valuations achieved in your industry's recent financings or M&A transactions. In case, you're unable to have access to the relevant data, don't shy away from taking the help of a financial advisor.
Make sure what you have to offer is unique and best in the industry. This is where the basic economic principle of Supply and demand comes into play. The more scarce a supply, the higher the demand. For example, if you're offering a hot new patented technology, multiple investors will be interested in competing for that particular deal, and drive up your valuation in the process.
The key to higher valuation basically is, never let an investor think that they're the only one competing in the race because that way there is a strong chance that your startup will be valued at a lower price. In case, you're not getting a "real demand" from multiple investors, creating a "perceived demand" can often work in the same way when dealing with one investor.
These multiples can range from industry to industry. We can assume that EBITDA multiples (earnings before interest, taxes, depreciation, and amortization) can range from 3x to 10x, depending on the "story" of your startup.
Typically, a private company valuations get a 25 to 35 percent discount to public company valuations. While, M&A transactions can come at a 25 to 35 percent premium to financing valuations, as the founders are increasingly taking all their upside off the table.
Make sure you take note of all this and adjust for these when comparing to any public market data.
In order to beat them at their own game, try collecting a few term sheets from multiple investors, and compare valuations and other terms, and play them off each other to lock in the best deal for yourself. As per the rule of thumb, you can be expected to give up 25 to 35 percent of your equity, in each equity financing that your startup makes.
According to the Industry experts - Just like everything, your startup is only worth what somebody is willing to pay for it. The method and techniques employed by one investor in one industry can be very different from the ones applied by another buyer in another industry.
Related reading - 5 Top Questions VCs May Ask Startups
So, before you approach investors with valuation expectations, make sure you have studied the valuations achieved in recent financings or Merger & Acquisition transactions in your industry. If you feel you do not have access to relevant valuation statistics for your industry, engage a financial advisor that can assist you.
Anyways, to help everyone related to startups have better valuation of their startups, we at IndianWeb2 have complied a list of six driving forces that drives your startup's value in the industry.
1) Industry Matters -
The Industry to which your startup belongs makes a huge difference to its valuation. Each industry has different valuation methodologies at play when compared to another industry. For example, a biotech business venture can be expected to be priced at a much higher valuation when compared to another family restaurant in the market.
Hence, before you start the long process of approaching investors for valuation, make sure you have done a thorough research of the valuations achieved in your industry's recent financings or M&A transactions. In case, you're unable to have access to the relevant data, don't shy away from taking the help of a financial advisor.
2) Demand and Supply
Make sure what you have to offer is unique and best in the industry. This is where the basic economic principle of Supply and demand comes into play. The more scarce a supply, the higher the demand. For example, if you're offering a hot new patented technology, multiple investors will be interested in competing for that particular deal, and drive up your valuation in the process.
The key to higher valuation basically is, never let an investor think that they're the only one competing in the race because that way there is a strong chance that your startup will be valued at a lower price. In case, you're not getting a "real demand" from multiple investors, creating a "perceived demand" can often work in the same way when dealing with one investor.
3) The valuation techniques -
In case of investors who employ techniques to value a particular startup, they're most likely to look after the following points:a) A discounted cash flow analysis of forecasted cash flows from your business venture.
b) Cash flow, revenue or net income multiples from recent financings in the industry to which your startup belongs
c) Revenue, cash flow or net income multiples from recent M&A transactions in your startup's industry.
These multiples can range from industry to industry. We can assume that EBITDA multiples (earnings before interest, taxes, depreciation, and amortization) can range from 3x to 10x, depending on the "story" of your startup.
Typically, a private company valuations get a 25 to 35 percent discount to public company valuations. While, M&A transactions can come at a 25 to 35 percent premium to financing valuations, as the founders are increasingly taking all their upside off the table.
Make sure you take note of all this and adjust for these when comparing to any public market data.
4) The Development Stage of your startup -
Your startup's development stage can also play a crucial role in determining its valuation. Whether your startup is in early stage growth level or mid stage growth level etc., will have a drastic change in its valuation. As you pass each stage of your growth, your valuation is also keep moving up along the way.5) Give the investors what they're looking for -
a 10x return on their investment An investor typically auditions about more than ten startups before finalising the one in which he/she really wants to invest. You as an investment have to give the investor a reason why he/she should dump the other nine and choose you as his investment. Make sure you show your investor a 10x return carrot through your five year forecasted financial growth.6) The thumb Rule -
See, at the end, an investor has been doing this investment thing for a long time. He knows how much a particular business is worth and what it is not.In order to beat them at their own game, try collecting a few term sheets from multiple investors, and compare valuations and other terms, and play them off each other to lock in the best deal for yourself. As per the rule of thumb, you can be expected to give up 25 to 35 percent of your equity, in each equity financing that your startup makes.
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