Finding Value in Startups: 5 Factors to Consider

“What is your rating?”

As an angel investor, this is one of the first questions I ask when talking to a founder about a potential investment. And often you hear numbers that are either too low or very high.

For example, a founder who recently graduated from an elite business school said that an early-stage fintech company is worth $50 million. The startup had two full-time employees at a business school. There was no IP, no MVP, and the founders only had a general idea of ​​a go-to-market strategy. I soon ended the meeting because the factors they used to arrive at the assessment were not grounded in reality.

Another CEO I spoke to had a game-changing product, a sizable Total Available Market (TAM), a successful beta, some product sales, an impressive team, and a well-rounded go-to-market strategy. When this founder said her business was worth $500,000, I advised her to reconsider her value because it was very underrated.

Many investors wouldn’t give this advice to a founder they just met, but they encouraged the founder to do their homework again because the startup had potential.

What is “evaluation”?

The value of a startup represents what it is worth at a given point in time. The elements that make up an evaluation include the stages of development of a product or service. proof of concept in the marketplace; CEO and his team; Valuing peers or similar startups; existing strategic relationships and customers; and sales.

There is no exact science for figuring out how much money you will need in the future, but there are patterns you can look for in certain sectors and industries.

Entrepreneurs generally value their startups when raising capital or offering shares to teams, board members and advisors. Accurate evaluation of startups is very important. This is because if you overvalue it, investors are more likely not to give you money.

On the other hand, underestimating a startup means giving up a lot of capital for less or underestimating what you’ve built so far.

more art than science

There is no simple formula to follow when evaluating a startup. Because most startups cannot demonstrate commercial success at scale, valuation takes into account the nature of the product or service, its business and its predictions for TAM.

You may have heard that valuation is more of an art than a science. This is often true. Startups often do not have enough concrete data at an early stage and face various risks that can change the course of their business. Many traditional valuation methods, such as cash flow discounts, are not useful for valuing early stage startups. This means that investors will have to measure other factors that cannot be easily measured.

As a founder, your job is to show:

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