You have a startup in the United States and you want to value it before you present it to other investors. The key question becomes: how do you even begin to value your small business?
It’s of utmost importance for entrepreneurs to place a value on their startups. By doing this, you can raise business funding, investors can place a value on their investments to build liquidity, and you can garner publicity when it’s fundraising time – before, during and after. It’s also wise to remember that during the initial stages, the valuation doesn’t actually highlight the true value of your startup.
See also: How to Value a Business
The methodologies that venture capitalists, angel investors, consultants and business owners employ to calculate the valuation varies in different industries. Perhaps the answer is as simple as this: your business is worth whatever somebody is willing to pay for it.
With that being said, here are five ways on how to value your startup:
1. What Does the Market Say?
If the market’s group of investors is informing you that your startup is worth $250,000, then that is what it’s worth. There is no other way around it. However, you may consider that it’s worth a lot more than that because of its valuable liquid assets, room for growth, and receivables. To investors, though, market valuation is a lot more important to them than your calculations.
2. Persist: Tell the Market How Much You're Worth
You’re dissatisfied with this market valuation, so then you have another option: tell the market how much you’re worth. This is done by telling the market how much you’re actually worth. To achieve this result, you have to perform a series of measures to increase your market value:
- Compare your company’s worth to other businesses within your industry.
- Project future revenues and forecast the growth of your small business.
- If you’re seeking funding, then you have to tell the market how much you need.
3. The Laws of Supply and Demand...and Your Industry
When it comes down to the valuation process of your business, it can simply be a matter of the laws of supply and demand. Here’s out it works: the scarcer your supply, the higher the demand, and vice versa. You also have two other tools in your arsenal: real demand for a series of investors and perceived demand for just one investor.
In addition, you have to consider your industry. For instance, a biotech business, a dot-com business or a social media venture will be a lot more valuable than a coffee shop, flower shop, family diner, variety store or a tea retailer. Moreover, review recent merger and acquisition transactions in your industry to get a feel of what business valuations are.
4. Your Stage of Development
For any business, there is always a stage of development. As far as we can understand, there are four primary stages of development, and each stage comes with different valuations and various fundraising amounts. Here are the four stages of development, which can be likened to high school:
- Freshman: a startup just started ($50,000 to $500,000)
- Sophomore: an established startup ($500,000 to $1 million)
- Junior: a growing startup with a large clientele ($1 million to $5 million)
- Senior: a startup generating millions of dollars in revenues ($5 million to $50 million)
As you progress to the next stage, your valuation starts to ascend and match those steps.
5. Your Startup's Potential Growth
It’s no secret that any startup or small business has potential for considerable growth. However, the market fluctuates, the entrepreneur is too much of a rookie, and investors can become soured on certain industries. You have to tell the market, investors and consumers that you have an idea that can thrive, be cultivated and generate enough revenues. You have to understand market trends, industry evolution and business acumen. It’s also important to start off and continue to build a strong reputation.
Although it would be common sense to think that you’re only valuable once you become profitable, we have learned to the contrary that it’s all about speculation and perception. There are many companies that haven’t profited a dime but they’re still valued at millions, or even billions.
Snapchat is the hottest tech startup around and it’s worth $10 billion, but it generates little revenues and hasn’t made a profit. Online file sharing company Box is valued rather high but recently posted a loss of $170 million. Twitter is world-renowned but it, too, posts immense losses. The pattern, however, is that they’re all in the realm of tech. If you are as well, then you have great opportunities for strong valuation.
Overall, you still have to take the aforementioned measures to properly value your startup.