Advice on how a startup value is determined and why it is essential information for fundraising.
Before fundraising, it is important for businesses to be able to place a value on their company for the information of potential investors. However, for young businesses especially, this can prove challenging.
Despite the challenge, it is essential that a value is determined. This is because the value of the business will work to determine share percentage and value. A £2m business value, for example, would provide a £500,000 investor with a 20% share, compared with a 14% share if the business was valued higher, at £3m. For investors, share percentage is a vital aspect, determining return on investment upon exit. Therefore, there can often be slight conflict in early stage valuation, as business owners will typically wish to retain greater equity through a higher valuation, while investors may slightly underestimate.
For a young business, there will usually be a significant lack of beneficial data upon which to base their value, and using past performance can sometimes be wildly inaccurate, as previous successes are not always a good indicator of future successes. Therefore, alternative valuation methods are necessary.