Startup Valuation Is Not That Important
If this title got you excited, you could be a fan of television shows or funding events, where unlimited money seems to be on offer and deals closing like some everyday bargain. The real world could be different, though.Once you have a prospective investor excited about your team, your merchandise, and your business, they will invariably ask about your company’s valuation? Many entrepreneurs stumble at this stage, losing the deal or the majority of their possession. They either give no answer or quote an excessive and indefensible number that convinces the investor that they don’t understand fundamental economics. Kevin Harrington, from Shark Tank, says
“Nothing turns off an investor more than when an entrepreneur comes in with a ridiculous valuation”
The entrepreneurs who actually get to make a cut with the investors are excellent negotiators, who back their case with sound logic and solid numbers. The investors, on the other side, appear to be making quick negotiations and snap decisions. However, this is because the pointers for estimating a ballpark valuation are already available to them. Most of the serious investors have significant experience in this area. They can judge a business for what it is within a few minutes. So, before you begin ask yourself if you know your market size, cash flows, working capital, break even, and strengths/weaknesses.Two creators of a brand new medical care internet site firm named XYZ have spent $200K of individual and family funds over a 12-month period to start the business, get a prototype site ready to go, and have already produced some Buzz in the Internet community. The creators now want a $1M Angel investment to do the advertising for a nationwide XYZ rollout, assemble a team to manage blogs along with other resources, and possibly even pay themselves a wage.
How much is XYZ worth to investors at this stage? What percent of XYZ does the investor own after the $1M infusion? Well, if the parties agree to a pre-money valuation of $1M, then the post cash investor possession is 50%. And on the other hand, if the pre-money valuation is $4M, the creators’ stake remains at a comfortable 80%.