Valuing a Startup - Indicative Guide
Any entrepreneur needs to determine its startup business valuation at some point in time. A valuation is required to issue employee shares, raise money for your business or just for a sense of worth.
There are many different ways to value a company, whether as a mature, listed company or as a startup venture. The latter, is more subjective as there is generally no reliable financial history. It has traditionally come down to a negotiation between the investor and entrepreneur based on the funding needs and market potential of the business.
In equity crowdfunding, this lengthy negotiation process is now a one-way street. It is the entrepreneur who will decide the valuation of the business, the funding requirements and the equity to be issued to new crowd investors.
It is therefore important that entrepreneurs understand how to value a startup business and strike a balance on the fine line between providing good value to entice investors whilst preserving enough equity to ensure just rewards for their efforts.
The following diagram should provide some guidance in terms of valuation but each business is different and realistic financial forecasts will still be required:
Each stage of the business lifecycle from an entrepreneur’s initial vision to market acceptance entails different levels of risk to the potential investor and therefore different valuations.
But there are factors that an equity crowdfunding investor will look towards in placing a value on the entrepreneur's business. An investor is quite a simple creature with two facets: greed and fear. Maximise the reward and mitigate the fear. Here's how you should critically assess your business prior to determining a valuation:
Entrepreneurs will note that the above attributes will be assessed and addressed within a business plan. All business plans will have financial forecasts, with reasonable and justified assumptions. These financial cashflow forecasts will be the basis of a startups business – using those future cashflows to justify a value today.
Equity crowdfunding has many advantages for entrepreneurs and investors alike, through the democratisation of capital. The value of any business is dictated by the agreement on price by a willing buyer and a willing seller. In equity crowdfunding, the seller is the entrepreneur and the willingness of the investor will become readily apparent when the campaign is launched.
Equity crowdfunding puts the onus for valuation squarely on the entrepreneur, so getting it right first time is crucial not only to attracting initial funding, but to maximise successful outcomes for everyone involved.