Justifying a Startup Valuation

Startup valuations differ from standard valuations in that they don’t solely rely on expected cash flows, book value, or other tangible aspects of the business.

Intangibles such as quality of the team, intellectual property, product status, and customers are the driving factors.

Most angel investors want 25% of the equity for an initial round of investment.

In addition, they want to have a say in the business through a board of directors or advisory role.

To justify your startup value, focus on articulating the values that are already in the business as follows:

Highlight the team you have built so far and their experience.

Show what the team is doing to make the company successful.

Show the current product development and highlight what has been done so far.

Outline the intellectual property you have, including provisional patents. 

Make sure you file your provisional patents in advance of launching a fundraise so you can point to having patent-pending technology.

Always note customers even if they are not yet paying for your product.  

If you do have some revenue, use it to prove market validation showing customers will pay for it. 

Customer involvement will generate a higher valuation. 

If you cannot sell the proposed valuation for the raise, consider cutting the fundraise target in half.  

While the valuation will be the same, the risk will appear lower.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.

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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.