“What is your assessment?”
As an angel investor, this is one of my first questions when I talk to founders about a possible investment. And often I hear numbers that are too low or too high.
For example, a founder who graduated from an elite business school recently told me that his early-stage fintech company was worth $50 million. The startup had two employees who were in business school full time. There was no IP, no MVP and the founder only had a general idea of the marketing strategy. I ended the meeting shortly after, because the factors they used to arrive at the assessment had no basis in reality.
Another CEO I spoke with had an innovative product, a sizeable total available market (TAM), successful betas, some product sales, an impressive team, and a well-thought-out go-to-market strategy. When this founder said the business was worth $500,000, I advised her to reconsider her valuation because it was extremely low.
Many investors wouldn’t give this kind of advice to a founder they just met, but because the startup had potential, I encouraged the founder to redo his homework.
What is “valuation”?
The valuation of a startup indicates what it is worth at a given moment. The factors that make up the assessment include the stage of development of the product or service; proof of concept in your market; the CEO and his team; peer reviews or similar startups; existing strategic relationships and customers; and sales
While there’s no exact science to calculating how much money you’ll need in the future, certain sectors and industries have patterns you can look for.
Entrepreneurs typically value their startup when they raise capital or when they give shares to their team, board members, and advisors. Having an accurate valuation of your startup is critical, because if you overvalue it, investors are not likely to give you money.
On the other hand, undervaluing your startup means you’re giving up a lot of capital for less money, or undervaluing what you’ve built so far.
It is more art than science.
There is no simple formula to follow when valuing your startup. Because most start-ups can’t really demonstrate commercial success on a large scale, valuations take into account the nature of the product or service, projections for the business, and TAM.
You may have heard that valuation is more of an art than a science, and it’s often true: startups often don’t have enough hard data at the early stage and face a variety of risk factors that could change course. of the business. Many traditional valuation methods, such as discounted cash flow, are not as useful for valuing early-stage startups. This means that investors have to measure other factors that are not so easy to measure.
As a founder, your job is to show: