What is your valuation?
This is one of the first questions I ask when talking to a potential investor. I hear numbers that are either too low or high.
A founder of an early-stage fintech firm recently told me his firm was worth $50 million. Two of the startup's employees are in business school. The founder had a general idea of the go-to-market strategy. The factors used to arrive at the valuation had no basis in reality, so I ended the meeting.
A CEO I spoke with had a game-changing product, sizable total available market, successful trials, some product sales, an impressive team, and a well thought out go-to-market strategy. I told the founder to reconsider her valuation because it was very low.
Many investors wouldn't offer this kind of advice to a founder they had just met, but because the startup had potential, I encouraged her to redo her homework.
A startup's valuation is what it is worth at a given point in time. The development stage of the product or service, proof-of-concept in its market, the CEO and their team, valuations of peers or similar startups, and existing strategic relationships and customers are some of the factors that make up the valuation.
While there is no exact science for figuring out how much money you’ll need down the road, certain sectors and industries have patterns you can look for.
Entrepreneurs value their startup when raising capital or giving shares to their team. If you underestimate your startup's value, investors won't give you any money.
Undervaluing your startup means giving up a lot of equity for less money, or you are undervaluing what you have built so far.
There isn't a simple formula to value your startup. Because most startups can't really prove their commercial success at a large scale, valuations take into account the nature of the product or service, projections for the business and the TAM.
You may have heard that valuation is more of an art than a science, and it's often true, as startups often don't have enough concrete data at the early stage and face a range of risk factors that could change the course of the business. Discounted cash flow isn't as useful for valuing early-stage startups as other traditional valuation methods. It means investors have to look at other factors that aren't easy to measure.
Your job as a founder is to showcase.
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