Today, we’ll talk about how to value your startup.
Since startups don’t have significant revenue then how do you value your startup when fundraising?
Traditional tools such as discounted cash flow, book value, and other standard accounting techniques don’t work for early stage companies.
For startup valuations we use the rule of 4.
For each value you have built into the business for revenue, team, product, and IP, give your startup $1M in valuation.
So for revenue, if you have 5 enterprise customers with contracts signed then give your startup $1M of valuation. If you have something less than that, then reduce the valuation. Say you have only 1 customer who is paying, then give your startup $200K in valuation. If you have no revenue, then give your startup $0 valuation.
If you have the team in place and working well, then give your startup $1M in valuation. If you only have two in place then give your startup $500K..
If you have the product up and running and ready to ship to the customer then give your startup $1M in valuation. If you have it in beta version then give your startup $400K..
If you have the patents filed and awarded then give your startup a $1M valuation. If instead you have a handful of provisional patents filed, then give your startup say $200K.
You then add up each of the 4 components and that gives you your startup valuation. In this example, the valuation would be $1.3M.
In the end, startup valuation is not a formula but rather a negotiation. No matter, what valuation you put forth, the investor will challenge it.
By using the rule of 4 you can articulate the values in your business which will be much more compelling then the usual response of “well I just think it’s worth that.”
Thank you for joining us for the Startup Espresso where we help startups and investors connect for funding.
Let’s go startup something today!
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NOTE: Investor Connect is a program under the Texas Open Angel Network which is a 501(c3) non-profit dedicated to the education around startup funding. Hall Martin is the principal contact, and may be reached at http://www.investorconnect.org/contact.
Hall T. Martin is the Director of Investor Connect which is 501c3 non-profit 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 as a basis for investment decisions.