If you’re a first-timer in the world of starting up and have not had taken any brush-up with the basic finance course then chances are that you are among many who pause and wonder about how a dollar today is worth more than a dollar 5 years later. Now you just have to replace that dollar with your Baby Business and that’s how you value your Startup. Seems easy right? But no, not really.
In a conversation with Vineeta Gupta, VP-Investments at SucSEED Ventures Innovation, we tried to establish the understanding around Startup valuation and exits for startups at an early stage in their life cycle.
Valuing a Startup
“Though the value of a Startup looks simple – future earning discounted to their net present value, the method and achieving accuracy is as complex as predicting the future today”
There are internal as well as external factors that affect the value of a Startup. Internal factors being the zeal and drive of the founder(and the team) to pursue and persevere the idea to execution to success whereas some of the external factors are the market, competition, geography, product-market fit, success and acceptability rate with the customers etc.
It is more difficult to value an early-stage partly because of the absence of operating history and partly because most young firms do not make it through these early stages to success.
However, for founders, it gets even more confusing with the plethora of Angels, VCs and their different or sometimes a combination of different valuation methods. That thrown upon the meagre cognizance of tech founders with Financial terms.
To ease out on this bit of confusion on the founders’ part, some of the factors that valuation depends on for an early-stage company are Founder’s track record, revenue(if any), risk, Geographic location, competition, founder’s passion, team and current market condition to name a few.
The need for Valuation
“Valuation, at the end of the day, is just a number which becomes relevant only when you are raising”
There is a life cycle that every Startup goes through from raising the first capital from f&f, Seed, SeriesA/B/C/D… f(as reported by a VC in the US) and going global or public or getting acquired.
Mechanisms to defend Value for startups
“When it comes to negotiating the value; the founder wants more and the investor wants to pay less, making it a tug of war between the two”
The basis for negotiation for startups:
- Show how unique your idea or concept is – if it’s a mere 10% change, you’re giving yourself to be beaten down by the investor
- The team: Experienced professionals are mostly preferred over fresh-out-of college rookies
- Strategic relationship – how well connected and market-aware you are
Demonstrating potential to the Investor
“You have to get the investor attached to your idea through a convincing and compelling demonstration of your idea among the 100s of others that are on his/her mind”
You have got a great concept, amazing but Where’s the action, the execution? Founders when raising capital need to do their homework and present their plan of execution to the investor in a way that shows, if not results, but preparedness.
- Market research: You must know the market you are entering headlong
- Revenue model or the monetization plan: Your solution, its reach, value addition to customer and how you are monetizing it
- Data/Stats that speak for itself and favour your hypothesis
- Revenues are good and important but so is the growth projection YoY or QoQ
Watch the complete interview to know more on valuation methods and some specific tips and tricks for founders
Keep watching this space for more under Fire Up Series.
Stay safe and sound!
– Sunita Kumari, Team CIE