business
HOW TO VALUE YOUR START-UP
One of the hardest questions almost every start-up entrepreneur faces, at one stage or another, is “How much my business is worth?”
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aluation matters to entrepreneurs because it determines the share of the company they have to give away to an investor in exchange for money. However, many entrepreneurs stumble at this question, losing the deal or most of their ownership, by having no answer, or quoting an exorbitant and indefensible number that convinces the investor that they don’t understand basic economics. Indeed, if you’ve ever watched Dragons’ Den on TV, you will have seen that valuation matters are common deal-breakers. At the early stage the value of the company is close to zero, but the valuation is a lot higher than that. How is that achieved? Early-stage valuation is commonly described as ‘an art rather than a science’. While many techniques have evolved to assist in assessing the value of early stage, ‘seed’ companies, the value of a start-up company can often be summed up as follows: The biggest determinant of your 20
start-up’s value are the market forces of the industry & sector in which it plays, which include the balance (or imbalance) between demand and supply of money, the size of recent exits, the willingness for an investor to pay a premium to get into a deal, and the level of desperation of the entrepreneur looking for money. We will now look at some of the factors that influence the valuation in more detail: Market Forces: A start-up company’s value, as mentioned earlier, is largely dictated by the market forces in the industry in which it operates. Specifically, the
If you’ve ever watched Dragons’ Den, you will have seen that valuation matters are common deal-breakers.
current value is dictated by the market forces in play today and today’s perception of what the future will bring. Effectively this means, on the downside, that if your company is operating in a space where the market for your industry is depressed and the outlook for the future isn’t any good either (regardless of what you are doing), then clearly what an investor is willing to pay for the company’s equity is going to be substantially reduced in spite of whatever successes the company is currently having (or will have) unless the investor is either privy to information about a potential market shift in the future, or is just willing to take the risk that the company will be able to shift the market. Traction: Traction is perhaps the most significant factor that can affect an investor’s decision to invest. The mission of every company is to get users (not necessarily customers!) and if the investor sees users then it means the business case is proved. The faster you get users, the more they are worth. How GIBRALTAR MAGAZINE MARCH 2020
