Cash flow problems can lead to the end of over 80 percent of small businesses. But if you know your startup valuation, you can look for an investment to get over that issue.
Valuing a startup involves a lot of factors, but it doesn’t have to be complicated. Keep reading to learn how to evaluate your company and how a digital platform might increase your value.
Startup Valuation Methods
The valuation of a startup can depend on a lot of factors. It depends on your industry, whether you offer a product or service, and where you’re at within the startup phase.
If you came up with your business in the past week, your business isn’t going to be worth as much as a company that’s been operating for a year.
Your startup valuation is super important, especially if you need outside investors. People need to know that they are getting a good deal when they invest. Good investors also want to make sure they will make back their initial investment.
Consider a few startup valuation methods that you can use.
Valuation by Stage
One of the easiest ways to come up with the valuation of a startup is to consider the business stage. Newer businesses will have lower valuations than more mature ones, and that’s okay.
- $250,000 to $500,000 for business ideas or plans
- $500,000 to $1 million for a management team
- $1 million to $5 million for a final prototype or product
- $5 million to $10 million for strategic partnerships
- $10 million+ for signs of profitability
Your startup will probably fall into one of these categories, so you can use the amount to set a valuation. However, you should also consider other factors. Investors will probably compare your company to the competition.
Market Multiple Approach
The market multiple approach focuses on what the market will pay for similar startups. You will need to research company acquisitions within your industry.
While the valuation of a startup that sells might not equal yours, it can give you a fair price to start. As you work with investors, you may need to negotiate, but the market will tell you what investors are willing to pay.
The numbers might not be as big as you hope, but you won’t have to go into an investment meeting with unrealistic expectations.
Instead, you can use the market to predict the success, and therefore the value of your business.
Cost-to-Duplicate
Another startup valuation method to consider is the cost-to-duplicate method. It determines your startup valuation by calculating how much it cost to create.
If you use proprietary software or production methods, that will increase the cost to recreate your company. But if you don’t have anything special that you use, the duplication cost would be lower.
To use this method, you can consider how much you have had to invest in your company. Then, you can calculate how much time you’ve spent to get the labor costs.
Finally, you can arrive at the amount of money it would take to start your business.
Discounted Cash Flow
The discounted cash flow method focuses on your startup’s potential earnings rather than current revenue. If you use this process, you need to predict how much cash your company will have in the future.
You’ll also need to figure out the expected rate of return for your investors. Then, you can calculate the value of that future cash flow based on the rate of return.
Depending on the stage and type of startup you have, there may be more risk. In that case, you’ll have a higher discount rate.
How to Increase Valuation
When you need outside investments, you want to get the best valuation possible. But you also shouldn’t overvalue your company because that can turn away investors.
You can use one of the startup valuation methods to get an approximate value. However, you may need to negotiate with your investors.
Before you start negotiating with investors, consider if you can increase your valuation naturally. By adding more value to your startup, you can give your investors more peace of mind that their money will be going to good use.
Consider working with a small business lawyer in San Jose to determine which route is best for you.
Develop a Digital Platform
A startup with a digital platform will have a higher valuation compared to one without. In general, digital businesses have higher valuations for a few reasons.
First, they can grow quickly without having to hire as many people. You can start your business from your home, so you don’t need to pay for office space or other physical costs.
You can create a transaction platform, where customers can purchase from you or get information. Or you can develop an innovation platform that other developers can use.
Either way, creating a digital platform is an easy way to grow your startup. But it’s not the only method you can use.
Unique Selling Proposition (USP)
Your unique selling proposition (USP) is what makes you stand out from the competition. In some cases, it can be a digital platform that you create.
But it can also be a unique design that you apply to a household product. If you’re in the early stages of your business, you could be your startup’s USP.
Whatever it is, getting clear on your USP can help investors see the value in your company. Then, you may be able to negotiate a better deal.
Become Profitable
If you don’t need investors now, consider waiting to get money until you start to earn a profit. Profitable businesses are almost always worth more than those that haven’t turned a profit.
It can and will take time for your business to have more revenue than expenses. But by waiting until that stage, you can show investors that your business is viable.
In many cases, investors will be more willing to shell out cash once you prove your business can make money.
The Perfect Startup Valuation
If you need an outside investment for your company, you should know how to value a start up. You can use a variety of startup valuation methods to determine your business’s worth.
Do you need legal help to determine your startup valuation? Contact us to learn how we can help.