Knowing what your startup is worth can be one of the hardest things as a startup founder. But the real problem is not necessarily finding the right valuation method, but avoiding a valuation too low or too high. What are the big problems with missing the Goldilocks Principle and not finding the golden middle ground?
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 high-growth business. How, in this situation, can you know your worth?
You need to pay attention to elements that influence growth. The most common things to look at include things such as:
There are also different valuation methods you can use to calculate your startup valuation. The most common methods include:
But whichever valuation method you use, the real problem is making sure the valuation is right – not too low or not too high.
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:
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:
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, the right valuation is often a compromise – neither party feels like they got the better out of the deal.
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.
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