Valuing a startup is no easy task. Whereas with a mature company, historical data is usually also considered, these are usually not available with a startup.
In principle, valuing the startup will not be the entrepreneur's top priority. But what to do the moment you want to raise external capital to accelerate growth or you yourself are approached by potential investors? At such a time, you want to know what the value of the business is. But then how do you determine the value of a startup?
What is the investment need?
It is essential that in a growth strategy, the startup first determine for itself how much money is necessary for the near future (next 1 to 2 years). With reasonable certainty, the cash flow forecast for this (short) period can be prepared. However, that forecast, especially on the turnover side, quickly becomes more uncertain the further ahead one looks. Therefore, a valuation using the commonly used discounted cash flow method is often difficult at this stage.
Negotiating with an investor
With startups, investors usually initially buy a minority stake in the business (<50%). This also keeps the founder major shareholder fully committed to the company. Selling, say, 40% of the shares at such a time leaves little room for any future investment rounds.
We see in the market that in such an early stage phase it often involves equity stakes between 5% -30%. But where in the 5% to 30% range do you end up with your equity stake? The final valuation at this stage depends mainly on the track record of the entrepreneur, the substantiation of the business plan and the size of the investment amount. Of course, how well the entrepreneur can convince the investor of the startup's growth potential is of great importance.
Check out our tips on how to calculate business value:
Pre and post-money valuations
In practice, we find that there is frequent confusion about the pre- and post-money value of a company. The pre-money valuation refers to the value of the company before a capital injection takes place. In post-money valuation, this investment is already included in the value.
Suppose pre-money the value for 100% of the shares is set at € 2,000,000. The investor would like to invest € 200,000 for 10%. However, the amount of money involved in this investment flows directly into the company and not to the seller. This immediately increases the value of the company by € 200,000. The post-money value is then € 2,000,000 + € 200,000 = € 2,200,000. The investor obtains 10% but would actually be entitled to 9.09% based on the post-money valuation. It is therefore important for parties to make clear agreements about what value is being discussed. Advisers with experience in valuing startups can help with this type of complex issue.
