Knowing the actual value of a startup may seem necessary only for publicly traded companies, startups seeking investors, or companies preparing for sales negotiations. Nevertheless, even if none of these apply to you, you can benefit from valuation as well. It may help you make more balanced decisions, analyze your liability, and identify strong and weak points.
In general, the more you know about your business, the less uncertainty you will face when making a decision. In this specific case, a valuation will show you where you can increase profit, and where you can reduce cost. This will eventually result in better cash flow and higher income. Moreover, this knowledge about your startup will also minimize its risk profile. As a whole, these outcomes are positive for your business value.
- “Health check” of your startup
It is important to remember that valuation is not an overview of a company’s profits and losses at a certain point in time, but rather it is a profile sustained over a longer period. If we compare it to medicine, validation should be seen more as an overall health check, rather than a single pulse reading. While the latter will give you an unrelatable figure, the former can show the strengths and weaknesses of the organism and help to improve this state in the future. So can the valuation. It should be considered during the strategic planning, and it will help you take the proper measures to make your startup even more successful.
- Control your risks
Moreover, a valuation is a chance to explore and control the risk profile of the startup, as it is less about the value while you own it and more about the value should you want to sell it.
Often, things that are considered valuable by the owner may be considered a risk by investors or can, in fact, be risky for the business. A good example of this is a company’s client base. Building a longterm relationship with a customer may take a lot of effort, and later it may constitute a big share of a startup’s income. But from a valuation point of view, this is a risk, as the loss of this client will result in a tremendous decrease in profit, perhaps even jeopardizing the startup’s existence. If you diversify the sources of your profit, you will more likely reach a higher value. By identifying situations like this during the valuation process, a company can become safer and thus more valuable.
Also, if a valuation is done improperly, the company may be overvalued and thereby over-leveraged with debt, which can result in a higher risk of failure.
Thus, it is not only essential to do a valuation, but also that it be done properly. This is why we consider it important to inform you about this essential process. Previously, we published a detailed guide to startup valuations. Now, we have prepared a list of features to keep in mind when performing it.
Are you ready for it?
As already mentioned, a valuation is not just a “snapshot” of the financial state of your startup. It is more accurately an indication of how sustains itself over a period of time. And to ensure a good outcome of the valuation, you need to prepare. To do so, we suggest the following steps:
- Do a due diligence test
- Keep the cash flow at a good level for a few months before the valuation
- try to improve unstable financial indicators
- keep your accounting documentation complete and in order
Other things you may want to do is consult with a financial advisor or talk to an accountant or broker - this will help to inform you even better about what you can expect in terms of valuation outcomes.
Paying customers matter
Of course, we all want to make the world a better place by offering awesome services for free. But that will not reflect well on your valuation. Some startuppers think that free-to-use services will attract the most users. But unless you can come up with a good monetization strategy, your world-changing idea will be a flop.
Therefore, it is better for your valuation to focus on the number of paying customers, rather than the general number of users. And this is also the number most investors will look at when considering whether or not to give you funds.
What’s your pace?
The point you are currently at is important, but you must also evaluate how long it has taken you to get there. Ask yourself, how long it has been since you founded your startup. How fast have you grown relative to your competition? Where does the company seem to be headed in the next 12 to 24 months?
This will help you both to conduct the valuation and to prepare you for interviews with investors.
All about profit
Your revenue figures can be misleading, as they do not show how much money was spent to get it. You may have promising revenue indicators due to offering discounts, sales, and giveaways, but considering margins, profitability, and cash flow is a better way to become one of the “unicorn” startups.
Your brand value
To get your first users and thereby generate your first profit, you need people to hear about you. This is called brand awareness, and it is critical for startup success. Nevertheless, it is not all about your marketing budget. Much of it comes from word of mouth, PR, and other sources. You can use these to raise your startup value without added expenses. A great example of this is the SpaceX company. It is currently valued between $20 and $25 billion, much of which goes back to the cult of personality surrounding Elon Musk.
Popularity among investors
The first investment is the hardest to get. Later, when investors see that the startup has succeeded through several funding rounds, their interest is piqued, since many investors have already seen something in your company, and nobody wants to be the one who did not take the chance and eventually missed an opportunity to contribute to something great. Thus, it is always a good idea to mention your previous investors when pitching to a new one. And, of course, every new funding you get increases your startup value.
Consider your market
Entering a fresh market or developing your own via a ground-breaking business concept can be a tough task for startups. Not only do you need to convince investors that your idea is brilliant, you must also convince the consumers that this new service is what they need (or there is a chance that they do not need it at all, explaining why the market does not exist in the first place).
Nevertheless, entering a mature market with well-established players and most of the niches filled can mean limited chances to develop, and as a result even more difficulty getting funds. So, either be innovative or go disrupt the already existing markets.
Know your business model
Ultimately, all the struggle around investment and valuation boils down to the business model you have and the way you make it work. Some may say it is about luck, but you have much more opportunity to make the right decision in the right moment if you have a good understanding of the main strengths of your business.
For example, Mark Zuckerberg and his co-founders were spending most of their time and effort getting advertisers for Facebook, until they realized that their biggest value was in their rich user data. Monetizing that has provided much better results for them than they would have had being just another ad-publisher.
As you can see, valuation of a startup can be tough. But it definitely needs to be done. With a valuation, you gain the benefits of two major insights: knowing your strengths and weaknesses and knowing how to improve your performance and minimize risk. We hope these tips will facilitate this process and contribute to your overall success.
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