Valuations are always a tricky topic as they can be very subjective for an early-stage business as valuations are certainly much more of an art than a science due to the fact that there is often very little hard evidence to go on. So, if we cannot rely upon using the traditional methods used for better established companies such as price to earnings or discounted cash flow then how do we best value a young business that only really has hope value rather than being able to point at years of trading history?
One method is to look at what other similar companies have been valued at at a similar stage and size, but often trying to find a company similar enough can be a problem. Another trap to be wary of is comparing valuations between countries as valuations in the US, for example, are often higher than in the UK. Another way is to use the balanced scorecard method which uses an algorithm to analyse your answers to a lot of questions. These would typically include: the total size of the market; the size of your realistic serviceable obtainable market; how experienced the team is; whether there is an advisory board; are the founders prepared to be trained and step aside in need; and many others.
Best practice would normally suggest using all of the above methods, comparing the different ranges of valuations obtained, and then settling on a realistic and defendable one. Remember that valuations tend to be higher if you are raising funds on a crowdfunding platform and lower if raising funds from a VC.
Whatever valuation you settle on there is one golden rule and that is do not over value your business. This will make your fundraising harder and should you wish to raise further funds in the future it is important for you to be able to demonstrate a growth in valuation.
Once you have arrived at a solid valuation you are then ready to consider your fundraising campaign properly. The best route to take will depend upon the stage of your business, how much you are looking at raising, whether you are looking for just investment or an investor to play an active part in your business, and so much more.
But whichever route you take, many of the aspects of your campaign will be the same. The basic requirements will be: a deep knowledge of your business; a good pitch deck and a business plan; a good team and an advisory board; know how much you want to raise and for what percentage of equity; what the money will be used for; and other things more specific to your business or sector.
All of this information, and all of your statutory documents such as articles of association, employee and other contracts, leases and other commercial documentation, and anything else that makes it easier for a potential investor to better understand you existing business and its future potential should be held in one place. This is called a data room and simply makes it quicker and easier for all involved.
Think carefully about whether your fundraise is targeted at business angels, crowdfunding, or VCs, as this will not only influence your campaign, but there are quite distinct benefits and drawbacks of each. Your relationship with investors should be a medium to long term one and so getting your valuation and fundraising campaign right, and choosing the right type of investor, can make all the difference to a scaling business.
This series of articles follows themes explored in more detail in my new book, Start-up to Scale up : what funders expect at each stage Go to the link to pre-order your copy and use the discount code 10off-start-to-scale to get a 10% discount.
2nd November 2021
in British English