Every startup essentially plans for seeking funds to have a glitch-free business journey. Fundraising help in shaping an effective business model, accelerating growth, and creating a business that disrupts conventional market scenarios. In today’s world of business, the success and sustainability of a startup are determined by the amount of funding it has acquired.
When a startup founder is not able to pool in the desired funds from internal sources, external avenues such as seed investors, VCs, and incubators come into the picture. However, approaching them is not a cakewalk and requires a thorough financial valuation process. If a company is making profits, valuation becomes comprehensible. But in the case of a startup, financial valuation is intrinsically different, and understanding it in detail is imperative.
What Is A Startup Valuation?
Startup valuation is simply quantifying the worth of a company with the use of qualitative attributes. Unlike the scenario of a profitable business, it is not dependent on calculating annual profits, revenues, and cash flows. An investor goes through an extensive financial study and certain market projections that are the primary contributors in the process of a startup valuation.
When there is close to no revenue or profits, a startup places a fair market value on their physical assets and intellectual property. The important intangible assets of the company such as skilled employees, early customers, customers in the pipeline, and others that contribute to sales are also considered a significant part of the valuation process.
Significance Of Startup Valuation
While raising funds, every startup needs to undergo a seed funding round in which an angel or seed investor pours in money into the business idea. The funds dispensed into the business are always in exchange for a part of the equity of the startup. This is the major reason that valuation is significant in determining the equity which a startup founder has to give to the investor during the fundraising process. Fundamentally, on the investors’ part, valuation holds great importance in helping them know the share of the startup that they will receive for the funds invested.
Apart from equity profiling, financial valuation of a startup is more of strategic planning that helps in understanding the overall wellbeing of the company – whether the idea is sustainable or has longevity. Additionally, it gives a chance to explore the areas of risk and identifying solutions to control it, make the business operations safer and profitable.
Factors Determining Startup Valuation At The Seed Stage
A thorough startup valuation results in successful fundraising. While proceeding with calculating the financial value of the company, investors and founders work logically and look at the factors that determine the entire process of valuation.
This is one of the key indicators in determining the value of a startup with no revenue or profit-making. It is the quantitative proof of knowing the growth and development of the company including – the number of customers, and sales generated with a low investment budget. In simpler terms, traction indicates the growth potential of the startup which is essential for potential investors to know.
Startup founders with a strong professional background and image are more opportune to acquiring funds than inexperienced or completely new entrepreneurs in the industry. Past track record, experience, and qualification ensure a positive image of the start-up in front of the investors.
Evaluating the revenue for a company that it makes in the initial stage of existence influences investors’ decisions. If a product has already been launched in the market and attracting a customer base, it can get through the funding round easily.
Distribution is one of the most impactful strategies in making a successful business. Startups having the right distribution channels in place and working can increase the chances of persuading investors.
The industry in which the startup operates plays a significant role in determining the success of it. Investors are likely to pay a higher premium for start-ups that belong to a booming sector.
Understanding the important factors that influence the decision of investors is vital. Keeping such indicators in mind, the startup founders need to identify the apt valuation methodologies to present the actual and genuine value of the company.
Quoting a high figure might give a tough time to the founders as a high value can lead to higher expectations and targets. On contrary, quoting a low figure can make the founders lose a higher part of equity to the investors. Thus, founders need to be genuine and realistic during the valuation process for better business ahead.