The Soft Side of Valuations

The Soft Side of Valuations

October 16, 2020 by investor

In setting the valuation for a startup, there are financial calculations, and then there are non-financial factors.

I call the non-financial factors the “soft side of valuations”.

These include the following:

Current market conditions — as the market heats, up certain sectors turn ‘hot’ and therefore command a higher valuation than the numbers indicate.

Predictability – companies with recurring revenue streams and long-term contracts command a higher valuation because their revenue is much more predictable.

Customer concentration — startups with a broader list of customers will survive longer. If a customer accounts for over half of the business, then this should be reflected in the valuation.

Pre-profitability — for early-stage companies, those with profitability should command a higher valuation.

Pre-revenue — for even earlier-stage businesses without revenue, intellectual property and customer forecasts come into play. 

Start with the financial calculation and then refine the valuation from there based on these issues.

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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.