“What is my startup worth?”
“Is the valuation I am being offered fair?”
Being confronted with having to value your venture without any financial data and often without proper finance training is the nightmare and reality of every startup founder. You don’t want to sell yourself short, and at the same time, you don’t want to seem unrealistic and lose a chance to raise capital.
There is a lot of confusion in the startup community around how accurate a valuation for a company with no financial history and no revenues can be and what exactly it measures.
There is a school of thought that treats startups as real estate. Under this premise, the startup value is purely based on supply and demand for a given “property”, which is, in this case, a startup team. While this is a valid approach, it misses a chance to discover the underdogs, or those “properties” that seem worthless, but then, metaphorically speaking, go on to win awards and earn almost $400M in the box office, like Slumdog Millionaire.
The Startup Station’s perspective, which we also share in this video, is different. In our view, the strength of a team translates into the strength of its value proposition, and the valuation of any company is ultimately the value of its business plan.
Of course, all of the factors that angel investors consider during their investment process are important. Team, product readiness, market size, traction - all play a key role in determining the company’s viability. However, they can also all be quantified initially in a business plan and further in a financial model, which, being the quantitative representation of the corresponding business plan, provides a robust justification for the resulting startup valuation. Each of these “soft” factors ultimately manifests itself either as cash flow or as a discount rate, which represents risk of a given venture.
Further, sometimes the process of creating a financial model can result in changes to your business plan which increase the financial feasibility of your venture.
Therefore, the more thought you put into the company’s strategy, the more you think through the company’s financial goals and how you can achieve them, the more you de-risk your company from the start, and the more your company becomes worth.
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