Council Post: Raising Capital? 10 Ways To Determine Your Company’s Valuation

A company’s valuation relies on the entire economic value of the whole business unit. This also takes into account investor agreements on how much the company is worth. Finding the sweet spot of your company’s valuation can make or break someone’s decision to invest in your company entirely. 

We asked 10 members of Young Entrepreneur Council their top tips for determining a company’s valuation prior to fundraising proceedings. Here, they explain why these tips are key to raising a successful round of capital and the future valuation of your business. 

1. Decide How Much Equity You’re Willing To Lose

Decide how much power you want to give away. The rule of thumb for seed-stage rounds is 10% to 20% of the equity in the company, and then equate that to the next 18-month fund requirement. Also, keep an eye on the controlling power to avoid dilution. This can be ensured by borrowing both equity and debt, but in the case of debt, the evaluation shall be made in terms of cash flow to cover the installments. – Vikas Agrawal, Infobrandz

2. Examine All Assets Before Valuation

I would recommend that you examine all of your assets prior to your valuation. You want to make an appropriate request when it comes time to fundraise, so put yourself in the shoes of the investor. Ask yourself if you would make a deal if you were in a room with someone with the resources you have available. – John Turner, SeedProd LLC

3. Use The Revenue Method

I like taking the revenue method for determining my company’s valuation. I take what my company does in annual revenue and multiply the figure by two. Generally speaking, two times earnings gives you a rough idea of what a company is worth before you fundraise or seek VC to scale up the firm. This model provides VCs with a more holistic view of a company’s financial potential than assets alone. – Amine Rahal, IronMonk Solutions

4. Get A Value Forecast From Experts

By definition, startups don’t have any past financial performance on which to base the valuation. Therefore, entrepreneurs can develop a process of valuation using value forecasts. It’s not tedious to forecast revenue at a startup, but it’s important to ascertain an estimate before your pitch. Value here is very subjective, so you need to rely on experts for an accurate forecast. – Kelly Richardson, Infobrandz

5. Build A Client Base And Get Testimonials

Current sales or the client list of a startup can play an important role in how it is evaluated. Investors value startups that don’t just promise value but also have real evidence that their work is valuable and currently in use. Build your client base and get testimonials as a way to win over investors and get better funding. – Syed Balkhi, WPBeginner

6. Work With The Government

There are governmental bodies focused on helping startups develop their businesses because it impacts the economy. One of the best things you can do is to work with such an organization and ask them to help you evaluate your company’s worth. Even if they don’t do it directly, they’ll send you to the right resources. – Blair Williams, MemberPress

7. Get A 409A Valuation

If you want some serious valuation for your company, you need a 409A valuation. Other factors affect the valuation of your business like the valuation of similar businesses at a similar stage or your ability to sell your idea to investors. I think a top tip is avoiding the temptation to overvalue your company. If you do, you may end up exposing your company to a market correction—a down round. – Samuel Thimothy, OneIMS – Integrated Marketing Solutions

8. Hold Meetings To Get Multiple Viewpoints

It’s a good idea to spend time with investors and founders prior to determining your company’s valuation. Before a formal fundraiser takes place, have a few meetings with investors to see where your company stands. Having several viewpoints will help you determine what it’s worth. – Jared Atchison, WPForms

9. Look At Similar Companies

You can get an idea of your company’s valuation by looking at similar companies. It’s easier to get an idea of its market value when you can evaluate your competitors and use them to gauge your own calculations. – Stephanie Wells, Formidable Forms

10. Consider Your Competitors’ Valuations

I suggest looking at the valuations of your competitors when they were at your stage. Businesses across all industries are different, but it boils down to the value you bring to the table. Compare yourself to your closest competitors and think objectively about the advantages and disadvantages of each business. It’s key to your success because investors know a realistic value for your business. – John Brackett, Smash Balloon LLC

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