How To Value My Startup? - FasterCapital

1. Startup Valuation

What is Startup valuation?

A startup valuation is what the startup is worth in the market depending on different factors. Startup valuation is a process that each entrepreneur has to do whenever they are raising money or even when they are looking for a cofounder (for example, the technical cofounder and the business cofounder programs require valuation).

Every business or a startup needs to have a financial analysis and valuation document created in order to determine the true worth of the startup. Most of the time, entrepreneurs omit this key step and instead try to estimate the value of their startups based on what they think it could be worth. This can be a dangerous route to go down because there is no guarantee that the market will agree with your assumptions.

The first step is to identify the market value of the startup based on its current size, stage of development, and potential future growth. After that, analysts use established valuation methods to find an appropriate price for the company. Finally, this number is adjusted for risk factors such as the startup's cash flow cushion and its competitive landscape.

We help entrepreneurs value their startups and we apply different types of startup valuation methods in order to reach a realistic and fair valuation of the startup. One of our unique advantages is that beside applying the standard methods, we have data from the market (either startups that joined our Raise Capital program or other startups) and we use the info to put an accurate valuation.

Factors that might affect your startup valuation

It is generally known that the valuation of a startup depends on the market trends and investor’s other alternatives. For example, when the NASDAQ 100 and/or S&P 500 are going up then the angel investors expect to generate more income through a risky investment in a startup.

Startup valuations are also affected sometimes but by illogical reasons, for instance startups in AI or Blockchain tend to be valued high because angel investors/VCs expect to see huge gain in these domains.

During the planning phase, we determine the value of the startup based on the startups that raise money recently in our network. We will not be disclosing the name of the startup but we will try to select a startup that is in a similar industry and can raise money. We will also try to have multiple valuations for the startup based on different forecasts and would propose the most appropriate one.

We also study the data of other startups in the market and the startup's own features to forecast the revenue and cash flow that will help us in valuing the startup. Having a clear valuation of the startup will help us in the negotiation with the angel investors or other different funding sources.

Since the valuation of the startup changes in every funding round and whenever the startup achieves a milestone, we will be helping the entrepreneur in valuing the startup through different rounds and determining the amount of equity that should be given. Usually in the planning phase, we will be preparing several scenarios of startup funding and in each scenario, we will be highlighting the funding needed, the valuation and the new milestone. Such clear planning will also help the angel investor understand what their gain is if the valuation is correct.

Startup Valuation for different stages 2. Startup Valuation for Seed Round Startup

Typically, a seed round is $500,000 or less. So, when you hear someone talking about their startup raising a "seed round of $2 million," they are really saying that they raised $2 million in their first round of funding.

There are a few things to keep in mind when calculating a seed round valuation. First, startups usually don't sell their equity (ownership) in their company during a seed round. So, the value of the equity is not as important when calculating the seed round valuation as it is when valuing an early stage company.

Second, the term "seed round" is often used to refer to rounds of funding that are smaller than Series A or B rounds. So, if a startup has raised two rounds of funding (A and B), but the third round is referred to as a "seed round," then the third round would be worth less than a Series A or B round because it's smaller.

Startups at this stage usually have little revenue and traction. It can be challenging to value a seed stage startup before you have found a product-market-fit. Setting clear milestones that you will achieve in specific timeframes and determine what sources you will be needing is a good way for valuing your startup. Also, understating the demand and the competitiveness of the product in the market also help you value your seed startup and what you should negotiate about during the negotiations with angel investors and negotiations with VCs. The best way to value a seed stage startup with no proven track record is through applying a comparable method. This is done by comparing the startup to other seed stage startups with similar industry, location, business model, and market size.

During the planning for funding phase, we help seed stage startups in identifying the right valuation for their seed funding round based on other startups that have already raised capital in our network and other startups in the market that share similar business models and are in the same industry and stage. We will also try to have multiple valuation for the startup based on different forecasts and would propose a conservative one.