The Art of Startup Valuations – What Every Entrepreneur Must Know

Facebook, Tumblr, Twitter, Instagram, Spotify, Pinterest, and the list goes on: It’s starting to seem like billion-dollar startup valuations are no longer that big a deal to achieve. But how does a young company get a billion-dollar price tag?

Putting a price tag on a young startup is a peculiar practice. While valuation models exist, many agree that it’s more of an art than a science, especially in the absence of revenue — if you’ve ever wondered how Instagram reached a billion dollar valuation without literally ever having made a cent, you’re not alone.

When a company is producing a profit or revenue, valuations can be based on thumb-suck math like five to ten times annual profit, or three to four times revenue. Great, but what if you were a VC in the early days of Twitter, Facebook, Pinterest, or Instagram?

A savvy investor will look at a bunch of stuff like the founding team’s track record, for example. The market the startup plays in is important — similar startups are templates for valuations, revenues or exit potential — and illustrating traction (growth), is a positive signal.

The below infographic by San Francisco-based startup organization Funders and Founders details how a startup is typically valued. A valuation is simply an estimated value of a company and is often based on assumptions about a startup’s potential. It’s not an exact science, explains Anna Vital, the author of the infographic in a blog post. A company’s valuation is important because it can determine the percentage of the company that should be given to an investor in exchange for cash, Vital says.

Do you think there are healthy valuations and investments happening in India as well? Or do we still lack the kind of risk taking investors and funds that would gamble on early stage companies?

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