During the pre-revenue stage of their life span, startup business owners can work out the value of their company by startup valuation methods. These are the ways in which a Startup business owner can find out the value of their company. These are important methods because mostly not startups are at a pre-revenue stage in their life span, so there are not any hard facts and figures to be the value of the business on. Because of the guesswork, an estimation has to be used, that is the reason why many Startup Valuation method frameworks have been discovered to help the startup business guess their valuation more accurately. The investors want the value to be low enough to get big returns on their investment whereas the business owners want the value to be as high as possible.
What Is A Startup?
A new business that is fast growing and aims to fill the hole in the Marketplace by offering and developing a new and unique product, service or process but is still overcoming the problems is a startup company.Startup companies require various types of funding to rapidly develop a business from their initial business model that they can grow.
The difference- Startup Valuation And Mature Business Valuation -
Startup business usually has little or no revenue or profit and is in an unstable stage. It is likely their product, procedure or service has reached the market yet. Due to this, it is difficult to place a valuation on the company. With mature businesses that get steady revenue and earnings, it is a bit easier. You just have to value the company as a multiple of their earnings before interest, depreciation, taxes and amortisation ( EBITDA).EBITDA can be shown by the formula -
Ebitda = Net Profit + Interest +Taxes +Depreciation + Amortization.With startup valuation, there is no information on which valuation can be based other than educated guesses and assumptions.
What Determines A Startup Value?
Positive factors
- Traction - the biggest factor of proving a valuation is to show that your company has clients. If you have a hundred thousand clients you have a good shot at raising $1 million.
- Reputation - if a Startup owner has a track record of coming up with good ideas or running a successful business or the product, service or procedure, he already has a good reputation so a startup is more likely to get a higher valuation even if there is no traction.
- Prototype - Any prototype a business has, that displays the service/product will help.
- Revenues - more important to business startups rather than consumer startups but revenue streams like to charge users will make it easier to value a company.
- Demand and Supply - if the business owners seeking money are more than the investors willing to invest, this may affect the valuation of your business. This includes the desperation of a business owner to secure investment and the willingness of an investor to pay a premium.
- Distribution Channel - it is important where a Startup sells its product if there is a good distribution channel the value of the startup will be more likely to be higher.
- The hotness of Industry - if there is a particular booming industry or popular investors are willing to pay a premium, it means your startup will be worth more if it forms in the right industry.
