If there’s one thing that could sway investors to provide you with the capital your startup needs to launch and scale, it’s how much they’ll earn from their initial investment.
For early-stage startup founders, this is easier said than done.
That’s because the primary purpose early-stage startups launch an equity crowdfunding campaign is so they can launch their minimum viable product (MVP) and start generating revenue. Convincing angel investors to fund your startup can be extremely challenging, with everything still theoretical.
This is why early-stage startup founders must conduct a startup valuation before launching an equity crowdfunding campaign.
In this article, you’ll learn how to properly conduct a startup valuation to provide angel investors with the evidence to convince them that your startup is a worthwhile and profitable investment opportunity.
But before that, let’s first learn what startup valuation is and why it’s crucial to your capital-raising efforts.
What is Startup Valuation?
Startup valuation is the process of determining your startup’s financial value.
This gives angel investors an insight into a startup’s health and growth potential. At the same time, it guides startup founders in their decision-making processes to maximise the resources they have to launch and scale efficiently.
Several factors influence a startup’s financial value. Among these are:
The size and growth potential of the target market significantly impacts a startup’s valuation. A large and untapped market with promising growth prospects can elevate the value of the business.
Intellectual Property and Assets
Patents, copyrights, trademarks, and proprietary technologies contribute to a startup’s valuation. Tangible assets like equipment and inventory and intangible assets like brand reputation and customer base are considered in the valuation process.
Revenue and Growth Potential
The current and projected revenue streams and the ability to scale operations and generate consistent growth play a crucial role in startup valuation. Investors are often interested in companies with high growth potential.
The competitive environment in which a startup operates can impact its valuation. Factors such as market share, barriers to entry, and differentiation from competitors are evaluated to assess a company’s competitive advantage.
How to Conduct a Startup Valuation
Step 1: Defining Your Business Model
Your startup’s business model is the cornerstone of the entire startup valuation process because it’s how you’ll make money once you launch. Investors need to see that your startup’s business model is profitable and scalable.
Start by developing your startup’s buyer persona. This is a semi-fictional representation of the ideal client or customer you’re targeting. It’s a combination of demographic and behavioural data researched and educated guesses. Having this in place lets you demonstrate to investors that you clearly understand your customers and the market demand you are addressing.
You’ll also need to identify the sources of revenue generation for your startup. This includes product sales, subscription fees, and other revenue streams relevant to your business model. Articulating your revenue streams helps angel investors estimate your startup’s future cash flows.
Make sure to showcase your startup’s scalability by detailing the potential for geographical expansion by leveraging technology. This will increase the attractiveness of your startup to potential investors.
Step 2: Conducting Market Research
Conducting thorough market research allows you to stay updated with the latest developments, consumer preferences, and industry shifts relevant to your industry. In turn, you can position your startup strategically and anticipate future opportunities and challenges.
Keeping a keen eye on emerging technologies, changes in consumer behaviour, and shifts in market demand will enable you to make informed decisions and showcase to potential investors that you know the market dynamics and can adapt accordingly.
Evaluate the competitive landscape by identifying your direct and indirect competitors’ market share, strengths, and weaknesses. This will enable you to position your startup effectively, highlight your unique selling proposition, and showcase the potential upside of investing in your startup to investors.
Step 3: Assessing Intellectual Property and Assets
Identify and value your startup’s intellectual properties, like patents, copyrights, trademarks, and proprietary technologies. Assessing your intellectual property’s strength and potential monetisation will provide insights into its contribution to the overall valuation.
Of course, don’t forget your tangible assets—physical items such as equipment, inventory, and real estate.
Evaluate the value and condition of your tangible assets, ensuring they are adequately accounted for in the valuation process. Assess the contribution of these assets to your startup’s overall value since they form a substantial portion of the worth.
Step 4: Analysing Financial Statements
Financial statements are the most critical of all the documents you present to potential investors.
That’s because they give investors a snapshot of your startup’s financial health, performance, and growth potential.
Ensure that all your financial statements are up-to-date and accurately reflect the financial position of your startup. Clear and transparent financial statements inspire confidence in potential investors and serve as a foundation for an accurate valuation.
Hiring an accountant is the most effective way to ensure it’s done right.
Based on your financial statements, an accountant can provide an objective perspective on your startup’s liquidity and financial stability. At the same time, an accountant can help you correct entries in your financial statements and ensure that investors won’t find any questionable or suspicious.
Step 5: Choosing the Startup Valuation Method to Use
There are four specific methods that you can use when you conduct a startup valuation:
1. Discounted Cash Flow (DCF)
DCF estimates the present value of a startup’s future cash flows by considering the time value of money. It provides a comprehensive and detailed valuation but relies heavily on accurate financial projections and assumptions.
2. Market Comparables
This method compares the startup’s financial metrics, such as revenue, growth rate, and profitability, with similar companies recently valued or acquired. It provides a benchmark based on market trends but can be challenging if comparable data is limited.
3. Venture Capital Method (VC Method)
As the name suggests, this startup valuation method is ideal if you intend to raise capital for your startup through the help of venture capital firms.
The VC Method calculates the value of a startup based on the expected exit value for investors. It considers factors such as projected exit timeline, expected return on investment, and industry-specific benchmarks. However, it heavily relies on assumptions and can be subjective.
4. Scorecard Method
The Scorecard Method assesses the startup’s value based on various qualitative and quantitative factors, such as the experience and track record of the management team, the company’s stage of development, and the market potential.
It offers a holistic view but can be subjective and vary depending on the investor’s preferences and factors like the management team’s experience, the stage of development, and market potential.
When choosing the method you’ll use to conduct a startup valuation, you’ll need to consider three crucial factors:
- your industry,
- the availability of comparable data, and
- the profile of your ideal investor.
For example, if your startup operates in a technology-driven industry with high growth potential, the DCF or VC method would work best.
However, if you don’t have access to comparable data, you may want to use the scorecard method instead, as it considers qualitative factors.
Step 6: Factoring in Risk and Uncertainty
Although investors understand that investing involves risks, they still want to know their risk level and how this will impact the expected returns when they invest in your startup.
That said, take the time to identify and evaluate internal and external risk factors such as the management team’s experience, market competition, regulatory changes, or economic uncertainties.
Adjust the valuation based on the level of risk associated with the impact on the required rate of return by understanding the investor’s perspective on risk.
Remember, investors evaluate startups based on their risk-return tradeoff. They assess the potential rewards against the perceived risks of investing in your startup. Understanding their perspective allows you to present a valuation that reflects their risk tolerance and increases the likelihood of securing investment.
Step 7: Determining a Valuation Range
At this point, you most likely have determined your startup’s financial value.
Now, it’s time to start planning your crowdfunding campaign, right?
You’ll still need to consider potential negotiation factors and adjust the valuation range accordingly. Negotiation factors can include market conditions, investor demand, the stage of development, or the growth potential of your startup.
Take into account these factors when determining the valuation range. Be prepared to adjust the range based on market dynamics and investor expectations. Consider a lower valuation if it can attract more investors or facilitate the negotiation process. However, ensure that the adjusted range is still fair and reflective of the intrinsic value of your startup.
Step 8: Fine-Tuning the Valuation
Seek feedback from investors who have shown interest in your startup or industry experts with experience valuing similar businesses. Consider their input on various aspects such as market dynamics, growth potential, or risk factors. Incorporating this feedback into your valuation allows you to refine your assumptions and better understand your startup’s value.
As you receive feedback and gain a deeper understanding of your startup’s valuation drivers, you must revisit your assumptions and adjust the valuation model accordingly.
Working with a startup mentor can help you navigate the intricacies of the valuation process, conduct in-depth analysis, and provide an unbiased perspective. A startup mentor can also assist in presenting the valuation to potential investors or stakeholders, bolstering your credibility and increasing confidence in your valuation.
Like everything else, seeking assistance from a startup mentor is a strategic decision that can add value to your startup valuation process. Consider the specific needs of your business and weigh the potential benefits of involving experts to ensure a robust and accurate valuation.
This article explored how to conduct a startup valuation before launching an equity crowdfunding campaign.
The process of startup valuation may seem daunting. But by following the steps shared in this article, you can confidently determine the value of your business. At the same time, you’ll be able to provide crucial insights to potential investors into the true worth of your startup, increasing its ability to attract and even convince potential startup investors to fund your venture.
Perhaps the best part about this is that you don’t have to do it alone.
Equity crowdfunding platforms like Trendscout have a team of startup mentors with the expertise, industry knowledge, and unbiased perspectives to properly determine your startup’s value. Their guidance can help you navigate intricacies, address unique challenges, and objectively assess your startup’s value.
Schedule a call with us today to learn more about how we can help.