The Art Of Start-Up Valuation: Best Practices For Successful Outcomes
March 19, 2023
Valuation is an essential step in the fundraising process for any start-up, as it helps founders and investors to make informed decisions regarding investment and growth strategies. However, start-up valuation can be complex and may be problematic in the future if not done accurately and consistently.
In this article, you’ll find Raise’s comprehensive guide on the best ways to approach the valuation of your company that will set your business on the path to success.
Utilize multiple valuation methods: we highly recommend using multiple valuation methods to determine the worth of your business as it aids in achieving a more accurate and reliable valuation. The top methods we use at Raise are:
Scorecard method
Checklist method
Venture Capital method
DCF (Discounted Cash Flow) with Long Term Growth
DCF (Discounted Cash Flow) with Multiples
It is important to understand the growth stage of your business in order to allocate appropriate weights to each method. The indicative value of your start-up is typically a weighted average of the above methods.
Focus on the future earning potential: The value of a start-up is largely based on the prospects of the business to succeed in the future. It is essential to consider factors such as the start-up's growth trajectory, market opportunity, risks, and competitive landscape. For example, the benefits that will accrue to investors who invest in a new invention have a high propensity to be enormous if the product is successful, with a high level of adoption. The returns will be further compounded by intellectual property protection and the restriction for competitors to recreate and market similar products. We call this a moat- the way in which a business can solidify its market position and protect it from external threats.
Evaluate the management team: When valuing your start-up, it is imperative to consider the team's experience, track record, portfolio, and capability to execute on the business idea and strategy. All of these greatly impact how successful the business can be and investors place great value on the strength of the management team.
Always be transparent: At every stage of your valuation journey, transparency is key. Investors want to know about the start-up's finances, operations, market potential and even the risks and shortcomings. Providing accurate and reliable information will help build trust and confidence in your business. This effectively implies that you need to keep detailed records of every development in your start-up.
Review and update regularly: The start-up space is quickly and consistently evolving, therefore, it is important to regularly update your valuation based on significant changes in your company’s performance and market trends. At the earlier stages of growth, the updates need to be more frequent as the business adapts and iterates in quick cycles.
Seek professional help: Valuing a start-up can be a daunting process and it is advisable to seek professional help. Valuation experts will help ensure a seamless process, help you to arrive at an accurate and reliable value, and also provide insights to help you to negotiate a good deal. At Raise, we can help you to value your business in a clear and credible manner, so you can focus on growing your business.
Additionally, here are a few things to avoid:
Do not compare your start-up to a publicly traded company: Public companies are often much larger and more established than startups. This means that they typically have access to more resources, historical records and more predictable revenue streams, which is not the case for start-ups.
Do not use a one-size-fits-all approach: All start-ups face a unique set of conditions and circumstances. Factors such as the business life-cycle stage, geographic location, industry, legal and regulatory environment, all greatly impact the valuation of a business.
By following the guidelines above, you and your prospective investors will be able to make better and informed decisions about your start-up’s valuation and growth strategies. Always remember that start-up valuation is more of an art than a science and that there are no hard and fast rules. Continue to focus on building a sustainable business and I wish you the best in your next valuation process and potential fundraising round!
Raise offers in-house valuation services using this methodology and takes an individualized approach in not only providing valuation services including reports, but a one-on-one consultation before and after the process for those doing a valuation for the first time.*
For more information or to sign up for a valuation, click here.
*additional fees apply for these consultations.