How Do Investors Value A Startup?

Valuing companies is tricky. The methods used to value a company are dependent on the stage of development of the startup.

Coming up with the price for early-stage startups is particularly difficult because they have little-to-no track record.

So here comes the question:

 How do angel investors value a startup?

If you are in this sector, you have probably heard quite often that:

Valuation is what the market is willing to pay

Well, assuming the market principle holds (and I couldn’t agree less), how does the market boil down to deciding how much it is willing to pay for something? I can hardly think of all market agents casting values randomly trying to guess. 

The truth is, market agents do follow some estimation methodology in trying to identify the intrinsic value of a high-growth enterprise.

Valuation  is not an exact science but rather a systemic approach that enables practitioners to estimate with reasonable accuracy what today’s price of a company is

Startup valuation is a specific discipline within the financial theory, as it needs to take into account much higher uncertainty compared to mature companies. In this regard, an analysis of financial data is just a part of this process and can’t exclude the assessment of qualitative data.

Thanks to the track record of the most experienced business angel investors, we are able not only to identify those features in a startup that will most likely determine success, but also to quantify their impact.

According to the research by the Kauffman foundation, there are 1+5 major categories which should be used to value a startup.

1| The Idea

Investors should like the concept behind the startup – that is, the problem being solved. As entrepreneur, you should focus on determining the clear need which leads people to use/buy what you offer. Of course, it’s up to the investor to believe you or not. Once the initial interest is triggered, the investor’s assessment will switch to other elements of your startup.

Quick tip: You can use storytelling in your investment proposition to make the investors believe in your vision for the company

2| Team

Does the team have the right experience and capabilities to seize the full potential of the business? Aspects under analysis are the relevant working experience, managerial and technical capabilities, past successes as entrepreneur, team spirit, commitment of the founders and the like.

3| Market/ sector size of the opportunity

How large is the potential of the business? Elements to take into consideration here are the market/sector, geographical focus, scalability of the business, projected growth and so on.

4| Product/ technology/ IP

What’s the product or service being offered and is that right for the purpose it should serve? Investors may assess the product/service roll-out, the fit with the market demand being addressed, the presence of IP and how easy it is to copy.

5| Competition 

Does the startup have competitors and how large is the threat created by them? Here you analyse the number and level of development of competitors, the quality of competitors’ product/services, threat by substitute products/services, competitive advantages and Unique Selling Points (USPs) of the startup.

6| Stage/ strategic alliances 

What’s the stage of development of the startup and what’s missing to reach the full potential? This category includes an analysis of the development stage, partnerships in place, resources, partnership and funds needed.

All these elements contribute a great deal to the final valuation. Being able to explain your strengths in these areas is pivotal in communicating and defending the valuation with investors as much as it is pivotal in calculating it for yourself.

P.S. Equidam Valuation Platform can help you calculate your business value. Get started with it here!