We’ve been told by several investors that our startup valuation model often produces reasonably good results. Of course, every situation is different, so your mileage may vary. Our model is intended more for educational purposes than for performing serious valuations. Please read this Important Disclaimer . If you need help valuing your company, we offer business valuation consulting services .
Answer the following 25 questions, and we’ll calculate an approximate valuation range for you. For each of the following questions, choose the answer that most closely describes your situation. The first choice produces the lowest values; the fourth choice produces the highest value.
Momentum The more developed your concept is, the less risk there is of failure. The ultimate investment is a company that is generating revenues, because it proves that you have a working product and that you have figured out how to get people to pay you for what you do.
Industry/Market There is greater competition among investors to get into startups in 'hot' markets like greentech or biotech, and this competition can drive up valuations. On the other hand, certain types of businesses such as retail and food service tend to generate much less interest. That doesn't mean you won't find an investor - it just means your valuation will be lower, and you will have to work harder to find investors.
Problem Solved If your product or service addresses an urgent, widespread source of pain, you have a large and receptive market. That makes it more attractive to investors.
Market Size Investors make their money once your company has a 'liquidity event,' or 'exit.' This is typically an initial public offering (IPO) or acquisition by another company. All else being equal, the likelihood of a successful exit, regardless of whether it is by IPO or acquisition, increases with the size of the market.
Furthermore, a large addressable market indicates strong demand and room in the market for more than a few major players.
Market Growth Rate A rapidly growing market suggests increasing demand, and opportunities for your company to grow along with the market. The growth rate of future cash flows is one of the most important factors in valuing any investment.
Competition Whether consumers know it or not, every need is being filled - perhaps poorly - by a direct competitor or by a substitute product. If you don't have any competitors, then there is no market for what you are selling.
On the other hand, if you plan to enter a market that is already well served by established companies, you can expect market entry to be a challenge.
The ideal situation is where needs are currently being served by poor substitutes. For example, suppose it is the early 1980s and the demand for mobile communications is being served by pay telephones. You come along with the first mobile phone - clearly, it is superior to pay phones (for those who can afford it and who want to lug it around).
Customer Traction In order to fill a need, you need to know your target customers extremely well. This helps to ensure that you're building something that the market actually wants.
Sales & Marketing Plan Business is all about generating revenues and profits, so you need to have a very clear understanding of how you will explain the benefits of your product to your target audience, and persuade them to pay you for what you offer. The more detailed your plan is, the more believable it is.
Revenue Traction Nothing - absolutely nothing - validates a business like paying customers. It proves that your company fills a real need in the market. By the time you've achieved revenues, you've also developed much of your company's infrastructure, core team, and initial product, so there is substantially less risk - from the investor's point of view - than in a pure startup.
Immediate Revenue Potential Despite what we said in the previous question, investors are often willing to back pre-revenue companies. However, your chances and your valuation increase substantially if you can demonstrate that your initial revenues will come in the near future.
5 Year Revenue Potential Venture Capitalists make their money when the companies they invest in have an IPO or are acquired by a larger company. Companies contemplating an IPO often have annual revenues of around $100 million, and VCs tend to look for these 'liquidity events' roughly 5 years after they make their initial investment.
Although companies much smaller than this can be attractive acquisition targets, most VCs will say that they don't have the time to manage a portfolio containing many small companies, so even if acquisition is your main exit strategy, it still helps if you can make a credible case for achieving around $100 million in revenues in 5 years.
Having said that, remember that venture capital isn't right for every type of business. It's perfectly normal for entrepreneurs to seek financing for smaller ventures from other types of investors.
Strategic Partnerships If you can convince well-established companies to put their reputations on the line by partnering with you, that says a lot about your product's market potential. This reduces the risk to the investors, and hence increases your valuation.
Intellectual Property In order to earn attractive profits, you need to have some long term sustainable competitive advantages. Well-crafted intellectual property can help to create this competitive advantage. The better developed your intellectual property (and other sources of competitive advantage), the higher your valuation.
Track Record Many investors feel that if you were successful at creating a profitable venture before, you stand a better chance of doing it again. Also, if you're already a well-known entrepreneur, there may be multiple investors competing to be a part of your deal, and that can drive up the valuation. If you're a first timer and nobody on your team has a track record of entrepreneurial success, you shouldn't expect somebody to write you a $5 million check for a 10% stake in your company.
Industry Experience Research shows that it takes 10,000 hours of effort to become a world-class expert on a topic. That's basically full time for five years. Since the world is a complicated place, investors feel comforted if you are an expert in the type of business you want to start, so it helps if your business is in an industry you already know well. That doesn't mean that an accountant can't start a successful restaurant, or that a mechanical engineer can't start a successful medical device company. It just means that you will have a harder time convincing investors that you know what you're doing.
Product Development Team If you have a technology-based product, then one important competitive advantage is having a product that will be technically challenging for your competitors to replicate. The number of highly-trained technical staff on your team is one possible way of measuring the complexity of your product.
Revenue Generating Team As noted earlier, companies with revenues are much more attractive to investors than those without. Having a team of sales professionals on your team implies that you have something to sell, and you have people actually selling it.
Business Plan Not all entrepreneurs need a great business plan in order to raise money, but most do. Investors see a lot of plans, and they are looking for reasons to thin out the pile, so your plan had better be excellent.
Furthermore, helping to raise money is only one of your business plan's many purposes. Most importantly, the business plan shows that you've given careful consideration to the numerous factors that will help determine your success or failure.
Sweat Equity Ideas are dime-a-dozen. People come up with great ideas all the time. No matter how good or unique you think your idea is, chances are, there are others already working on something very similar. An idea you came up with a few weeks ago is pretty worthless by itself. It only takes on value after some real work goes into making it a reality -- assuming the effort isn't misdirected.
Skin in the Game You're asking investors to risk a significant amount of capital. Before they do so, they need to know that you truly believe in and are committed to making the business a success. One way to persuade investors is by showing them that you're willing to bet everything you have on your concept.
Corporate Counsel It can be hard to imagine the number of things that can kill a company. However, many of them can be avoided if you have the right legal advice from the very beginning. Furthermore, attorneys who work with many startups will understand how to help you maximize the valuation you obtain from your investors. Legal advice is one area where entrepreneurs shouldn't skimp.
IP Counsel Intellectual property is the lifeblood of many technology companies. While patents may or may not give you significant competntive advantages, you need the advice of a good intellectual property attorney to ensure you maximize the value you extract from your innovations.
Competitive Advantages This is a catch-all question that covers a variety of competitive advantages. The more you can do to shore up your competitive position, the greater your value. The easier it is for somebody else to replicate what you are doing (i.e., solve the same problem for the same customers), the lower your value.
Scalability Professional equity investors - particularly venture capitalists - tend to favor business models that scale. This means that an increase in sales requires little or no increase in your fixed costs (and better yet, the variable cost is also low). A great example is software. The fixed cost (e.g., tech support) probably won't go up because you sold one additional license, and the variable cost (e.g. the cost of burning a CD) is also very low. Scalable businesses are valuable because the larger they become, the more profitable they become.
Comparable Deals As noted above, traditional quantitative valuation methods don't work very well with startups because there isn't a reliable, measurable revenue stream to base calculations on, and because financial projections are often based on highly subjective assumptions. Many professional equity investors simply ask themselves: 'What valuations are other investors using for deals in similar industries at similar stages of development?' Although this may seem somewhat arbitrary, assuming all else is roughly equal (again, this is a subjective judgment), comparables - or 'comps' are the way many other illiquid assets are valued, from real estate to antiques. Thus, you should keep an eye on VentureWire and similar services to stay abreast of the investments being made by the venture capital community.
My product or service is: Why does this matter?
My industry is: Why does this matter?
My product or service will: Why does this matter?
Global annual revenues in the sub-sector of the market I am competing in is: Why does this matter?
My market is: Why does this matter?
My primary competitors (others who are competing for the same consumer dollar by satisfying the same consumer need) are: Why does this matter?
My customers (or potential customers) have: Why does this matter?
My sales and marketing plan is: Why does this matter?
My revenues over the past 12 months were: Why does this matter?
My revenues over the next 12 months are expected to be: Why does this matter?
My revenues 5 years from now are expected to be: Why does this matter?
My strategic partnerships consist of: Why does this matter?
My intellectual property includes: Why does this matter?
The highest level of entrepreneurial experience achieved by anybody on my team consists of: Why does this matter?
I developed my expertise in this market by excelling at senior positions in the industry for: Why does this matter?
The number of Ph.D.s that have been working for me full time for at least three months is: Why does this matter?
The number of sales/marketing/ business development experts who understand and have extensive contacts within my industry who have been working for me full time for at least three months is: Why does this matter?
My business plan: Why does this matter?
"Why Business Plans Don't Get Funded"
I have invested ______ hours of my own time into this venture. Why does this matter?
I have invested ______ of my own funds (from savings, credit cards, second mortgage, selling blood, etc.) into this venture. Why does this matter?
My corporate attorney is: Why does this matter?
My intellectual property attorney is: Why does this matter?
If a Fortune 500 company decided to put their resources behind competing with my startup tomorrow, my startup would be: Why does this matter?
Once my product is on the market, my marginal gross margins - a new dollar of revenue minus the cost of producing that revenue - will: Why does this matter?
Other startups in my industry raising venture capital at a similar stage of development (product, management team, revenues, partnerships, prior funding, etc.) are getting pre-money valuations of: Why does this matter?
