- January 25, 2016
- Posted by: Jack Hudson
- Categories: Business, Business strategies
As many people who took some years in this crazy but exciting world of startups, one of the questions most often asked is, What value my company? I’ve resisted writing about it, as there are large items on the subject and it is complex to tell … but I think I can at least give my point of view.
It is quite easy and there are many references to evaluate startups in later stages, when they are growing, but billed … etc and seed stage / seed? How do you value a company by a financial analysis that no invoice or if it does not in large numbers, which has a mature product and begins to follow the path of growth but still has not consolidated metrics?
Many believe that a startup seed phase is 0, since it has not yet proven its worth in the market … while others say it’s worth a lot of its potential. And indeed both views are correct … but with caveats.
The reality is that they usually end startups are undervalued (not very common) or super-valued (most common) … but that any approach is colored by one thing: the absolute uncertainty of the business.
Rare buzzwords you will hear when talking about startups reviews
As you know the world is startup it is strongly conditioned by the USA ecosystem and is common to use words that many leave us at first face of fools. So I’ll try to tell some very common terms in this world:
Investment rounds: the events that are going to look for money, often have several phases: FFF (Friends, Family or Fools and immediate environment) -> Seed / Seed (with business angels) -> Series A (funded by Venture Capital typically national) -> Series B, C, D (funded)
VC: Venture Capital Fund (not the same as venture capital, Venture Capital also invests in phases or projects “riskier” includes Private Equity fund focused on generating growth in well-established companies)
Pre-money valuation: It really is the equivalent of dried valuation and indicates how much better your startup before you get the money you want. For example, if you are looking for 100K and think that your company is worth 500K, your opinion PREMONEY is 500K.
POST-MONEY Rating: From the hand of the former, is the money your business is worth adding the money you getting to close the round. In the previous case, your opinion would postmoney 600K (500K + 100K Pre-money).
Dilution: The “control” that you lose your company shareholder level when they enter new partners. If today you are 100% and two partners come tomorrow and each one gets 10%, you may have diluted 20%.
Here in HeyGom we recommend you to read another article: 5 Key tips to improve your finances in 2016.
Some ideas on valuation
Before we talk about the different valuation techniques, I think it’s important to convey some thoughts on the subject, not only because often we make mistakes in the assessment but do it for the wrong reasons.
Separate assessment of your ego: Unfortunately more often than we dare to say the issue of valuation we assume as a measure of our success. As a matter of size … when it is an instrument of our company, nothing more and nothing less and so we dedicate months to seek a valuation that we think reflects us and not our company (which is different). So remember that your job is not to find investors, but customers
Sizes rounds: At first (and in my opinion always) a bad idea to make huge pharaonic rounds that requires many months to close. Why not start the round in “phases”? Although much depends on the sector, I think you should look enough to withstand 6-8 months and money to jump into the next level … and these metrics look for the next round
And my advice is to always ask for more than you think you’ll need, because normally costs are always higher than expected, and lower income. How many? For perhaps 20-30%, but is more a personal opinion based on my experience that a figure drawn with a scientific method.
The investor profile also determines the valuation and value … Normally, the more experienced is the investor with whom to go talk more adjusting the valuation will end ….which means that you will dilute more. That is not, certainly, but we must confront it with another factor: the value that can give you an experienced investor is several orders of magnitude greater than that provided by a single financial partner. So weigh both approaches with all the data in hand
More tangible few better: My advice is to try to delay the most of that first round to give space to generate sufficient traction to support your opinion, and provide the necessary confidence to investors. Nobody invests in powerpoints but in the right metrics, and in this order: Revenue -> Users -> Social (contests, media …)
Value and valuation, cousins: The key is to understand that the valuation of your startup must be “partner” to the value that is created in the project … and between rounds must be justified and clear quantitative value jumps. Look at it from the point of view of the investor: if you invest in your startup is expected to multiply your investment because (among other things) … and the first requirement for this is that you are able to multiply the value of the company. If from one round to another there is a qualitative leap, new investors probably will doubt your ability to create this value.
Here in HeyGom we recommend you to read another article: 12 Tips to keep in mind if you want to start a business.
The impact of a high evaluation: A high valuation can compromise the future of your project, but now you’re happy because you’ve got to convince 10 investors to provide 200K to an assessment of 2M being in seed stage, most likely finish put the first nail in your coffin as discussed in the previous section, you have to take a major leap for the next round … and do you really think you’ll be able to prove that your company is worth 4 or 5M in 6 months, a year? The road is full of startups that have died from this.
How many rounds? It is said that the ideal number of rounds is equal to or less than zero … because the diluted causes gradually lose control of your company, and you have to deal with more people, increasing the complexity of management. But it is also true that having experienced people on board in your business is key to going faster and better absolutely. In addition, if you are facing experienced investors have exit is usually the difference between “almost” and do (but of course, much depends on what success is for you)
And remember, it’s key to understand (as shown in the chart below) that:
In early stages, the valuation is not a function of the actual value of the company but of the potential and above all, the percentage is transferred to investors.