Businesses may need to participate in fundraising efforts to secure additional capital, fund research efforts or expand their market reach. Before they can begin, however, leaders must determine their company’s valuation.
A valuation of a company is determined through various calculations that take into account factors such as market value and annual revenue. This step is crucial as it may determine whether or not investors choose to invest in your business.
If you’re about to begin the fundraising process for your startup, consider these eight factors that can influence your valuation, as shared by the members of Young Entrepreneur Council.
1. The Competition
Existing competition shows there is a viable market for your products and services, so consider competing company values in your valuation efforts. If there isn’t existing competition, the key is to be as realistic as possible. Nothing turns off investors faster than pie-in-the-sky forecasts and valuations. If you don’t have a valuation, work with a financial expert to create one based on real numbers that an investor can look at as a reliable source rather than a number you pulled out of thin air or found from a Google search. – Jonathan Prichard, MattressInsider.com
2. Your Ability To Match The Valuation Again
A higher valuation isn’t always a better valuation. There is such a thing as overvaluing a deal. This is where your fundraising round gets bid up so high that you find it really difficult to match the revenue goals or market traction to exceed that valuation. If you run low on your runway and need to raise again, you may have a down round, where the company valuation isn’t as high as it was in your previous round. Instead, make sure that you have a valuation that is as high as you can get and you know you can match or exceed that valuation again before you need to raise again. – Kaitlyn Witman, Rainfactory
3. Your Financial Health
If you’re seeking out investors, then it’s important to remember that your finances are a fundamental determinant of your valuation. You need to check the leverage, debt and profitability ratios of your business to get a clear understanding of how healthy your business is. When you know how well your business is doing, you won’t be blindsided when investors ask you difficult questions. Moreover, you’ll become familiar with the workings of your operations and figure out where you need to improve things. – Blair Williams, MemberPress
4. Cash Flow Projections
One very effective method is the Discounted Cash Flow (DCF) method. This business valuation is based on projections of future cash flow (similar to the earnings multiplier). These projections are then adjusted to get the current market value of the company. The biggest difference between the two is that the DCF method takes inflation into consideration to calculate the present value. Typically, investors believe a stock to be good if the DCF analysis value is higher than the current value of the shares. Keep in mind, the DCF method works better for some sectors than others. – Blair Thomas, eMerchantBroker
5. Your Future Potential
An important factor that should be considered when pursuing valuations for fundraising is what sets the business apart from the competition in future potential. Is there a breakthrough product launching in the next couple of years that might put the company in a superior market position compared to a second- or third-place position? When basing valuations on past performance or current market position alone, it’s easy to inadvertently undervalue a company—or overvalue it. What’s coming in the next one to five years matters far more, in my opinion, when it comes to determining a truly accurate company valuation. – Richard Fong, AssuredStandard.com
6. Your Value Within The Community
Anyone who fundraises is focused on the end goal, which is raising enough money for their project. That may be admirable, but what they forget is why this project is important to those who donate or to the community. Donors must believe in the project to donate. They begin to believe in the project when they see how the project is affecting people in the community. Increasing that community worthiness automatically increases the company’s valuation. You can create value for those planning to donate or expand your reach to those who don’t know you by documenting past success with pictures and video as well as statistics. A video works well because it is concise, visual and the story draws the viewer in. – Baruch Labunski, Rank Secure
7. The Equity You’re Willing To Sell
If you’re running a startup, it can be difficult to determine the valuation of your company based on past financial reports. At that point of fundraising, you most likely haven’t made money because you’re still trying to find product-market fit or are focused on growing your subscriber base. One tip that could work for leaders in this situation is to determine how much equity you’re willing to sell to investors. Then, determine the price of that equity by the capital needed to run the business for another two years. It’s a rough way of figuring out the value of your startup. For other business leaders who aren’t running a startup, revenue is a good benchmark. Some say the value of a business is two to three times their annual revenue. Asset evaluation is key as well. – Samuel Thimothy, OneIMS
8. Your Assets
When determining your company’s valuation, take stock of your assets. If you want compensation for the money put into your business and what it’s worth, you need to make an estimate of what it’s worth. Take stock of your assets, liabilities, investments and employees to determine what your business is worth. Make a detailed report of what you have so you’re confident when creating your fundraising plans. – Stephanie Wells, Formidable Forms