Credits: ThugStart.com Knowing can be one of the hardest things as a founder. But the real problem is not necessarily finding , but avoiding a valuation too low or too high. What are the big problems with missing the and not finding the golden middle ground? what your startup is worth startup the right valuation method Goldilocks Principle Startup valuation in a nutshell Startup valuation essentially points out the worth of your business — its idea, the product or service and so on. For an established business, knowing the valuation is rather straightforward. They can calculate the market value of the business using tangible metrics and assets, such as revenue, profits and customers. Your startup might not have any of these — after all, you’re working towards continuous growth. A startup by definition is a . How, in this situation, can you know your worth? high-growth business You need to pay attention to . The most common things to look at include things such as: elements that influence growth The hotness of the industry. The capabilities of the startup team. The product or service and its competitive advantage. There are also different valuation methods you can use to calculate your startup valuation. The include: most common methods — Your startup is valued in comparison with a similar startup. Comparables — Your startup valuation is drawn by examining investor preferences. Conformity — Your startup is valued by looking at the average or the most realistic valuation; i.e. you take the worst and the best-case scenario and look at the average. Averaging But whichever valuation method you use, the real problem is making sure the valuation is right — not too low or not too high. What happens when your valuation is not enough? You should know what amount of money you need to raise. If you end up raising it with a low startup valuation, you might be in trouble. Why? Because low valuation usually benefits the investor — it gives them a bigger equity stake in the company. However, you might also suffer from the following startup valuation problems: . is important — you’re looking for a VC who understands your passion and vision. If they do, they should understand the exact value of your startup and not value it too low. When the valuation is low, the investor might not really get your business. You end up with the wrong kind of investor Finding the right investor . Now, this kind of investor apathy (they know they got a huge bargain) might end up causing many problems. The investor might not have as much interest in helping you out because they need to work harder with startups with bigger valuation, i.e. with more on the line. You know your valuation is too low and the investor is not interested and so you start resenting them. When investor relations turn sour, things can start going downhill. Your investor relations turn sour . Low valuation results in lots of dilution, especially at the seed stage. If you have a low valuation and a hefty investment, you naturally end up losing a lot more equity. The more equity you need to give away at the early stage, the less of it, you have to give away in the rounds. A hefty dilution will be a red flag for future investors. You’ll have trouble raising money in the future future What happens when your startup valuation is too much? Your startup will undoubtedly want to push for a higher valuation because it means you can raise your required amount of money without losing a lot of equity. However, your startup could also suffer from a valuation that’s simply too high. An unreasonable high startup valuation could lead to problems like: . Similar to a low valuation, an extremely high valuation doesn’t necessarily mean the investor gets your startup concept. You might simply be attracting an investor with a lot of money to spare, but not one that’s super excited about the firm. Bad VCs and you need to be wary of them. You end up with the wrong kind of investor are out there . A high valuation might lead to short-term gain, but it can do damage to your startup in the long-term. You might send the wrong signals to investors: you’re not thinking about the company success, but personal gain. A high valuation increases expectations for the next rounds and makes it rather hard to keep increasing the valuation — you leave no margin for error; something startups should always do. You give up long-term strategy . High startup valuations are also rather efficient in distancing investors. The investor might start viewing the high valuation with resentment if things don’t go according to plan. Furthermore, since your next round will require a lot of traction, you might find it harder to attract interested investors. You’ll distance investors How to get the valuation just right? So, what happens when the valuation is just right? A good valuation will probably leave both the investor and you satisfied, but not overly happy. In a sense, — neither party feels like they got the better out of the deal. the right valuation is often a compromise How to guarantee the valuation is right? You really need to pick your valuation method and use it to come up with a figure you can justify. Startup valuation is often about predictions and estimations. However, this doesn’t mean there isn’t actual truth behind the valuation you come up with — . the investor and you need to be able to look at the figure and understand the reasoning Perhaps you have a $3 million valuation and the reasoning is the current market or the traction your startup has from the past six months. The key is to ensure you can point out these actual metrics and data to support your valuation. Figuring a method for startup valuation can be easier than ensuring the valuation you come up with is the right one. It’s important to try different things and make sure your valuation isn’t based on hopes and dreams, but cold, hard facts. Suggested Reads 1. Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms 2. Startup Evolution Curve From Idea to Profitable and Scalable Business: Startup Marketing Manual 3. The Startup Funding Book 4. The Funding Is Out There!: Access the Cash You Need to Impact Your Business 5. The Entrepreneur’s Growth Startup Handbook: 7 Secrets to Venture Funding and Successful Growth 6. Funding & Financial Execution for Early-Stage Companies 7. The Crowdfunding Handbook: Raise Money for Your Small Business or Start-Up with Equity Funding Portals 8. Startup Fundraising: How successful founders raise capital for their startups: Building an Investible Company, Pitching to Investors, Negotiating the … Else Tech Founders Must Do 9. How to Break Into Venture Capital and Think Like an Investor Whether You’re a Student, Entrepreneur or Working Professional 10. Funded: The Entrepreneur’s Guide to Raising Your First Round If you liked this and want more: How about few claps, 💬 comment on it, and/or follow me 😀 Also, if you would like to read more captivating stuff on the topics of entrepreneurship, marketing, social media, leadership, technology, innovation and venture capital via my regular posts then please click ‘Follow’ and feel free to connect via , , and . SlideShare Twitter Facebook LinkedIn P.S. here are my other . Articles on Medium
