Know Your Worth: How Startups Can Determine Their Valuation
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Determining the valuation of your startup before presenting to investors can provide you (the founder) with a better understanding of how much your startup is worth. Plus, it will allow you to pinpoint how investor negotiations should be handled. Although growth and traction might be challenging for early startups, a valuation can still be done. Here are some pointers on determining your startup’s valuation:
Determine Your Revenue
Revenue is king of startup valuation. Therefore, you should know how much money your startup has generated. However, it might be difficult to asses monetary growth early in the game, or your monetary assessment might not be up to par with venture capital (VC) standards and expectations. To prove the valuation and potential growth of your startup, you could include things like monthly views, weekly revenue instead of annual income, or positive reviews from a set number of customers. Using alternative yet legit revenue predictors can show VCs your valuation is promising.
Use the Berkus Method
Try your hand at using the Berkus Method when determining the valuation of your startup. Developed by a super angel investor — Dave Berkus — the Berkus method is designed for startups in the early stage of valuation. The method evaluates five key business model components and their risk. A set amount of money is added to the startup’s valuation, depending on the absence of risk in each category.
Include the Strength of Your Team and Innovation
Determining your startup’s valuation isn’t always a numbers game. Forbes breaks down the importance of the VC vetting process and how team management questions are likely to be asked. Include the strength of your team, and consider it an asset to VCs and investors. For example, if you or a cofounder is a proven expert in your startup’s industry, this can add to the potential success that might make VCs or investors feel more confident and raise the valuation of your startup. Also, include your track record as a founder. If you are a successful serial entrepreneur, calculate this into your valuation. A proven track record can signal an increase in your startup’s worth.
Size up the Market
A bit of research, in regards to competition and overall market standings, can behoove your valuation. In a Failory study of 100 startups, five percent failed due to bad market fit. However, if your startup fills a void in the market, your predicted valuation can be increased. Looking into your market industry can also give you a personal perspective on the success of your startup. If when researching the market, and similar companies didn’t pan out, it could be a sign to revamp or make adjustments to your original idea.
Be Honest About the Risk
When setting out to put a valuation number on your startup, being honest with yourself and your team can prevent any future pitfalls. One way to get a true picture of the risks in your startup is to use The Risk Factor Summation Method, which assesses 12 risk topics. This method takes a deeper dive into investigating startup risks that might blindside founders such as litigation, technology, reputation, and legislative risk.