Valuation Validation: Five ways to credibly value your startup for investors
If you want to get investors to seriously consider backing your business, you need to provide them with a justifiable company valuation. Many pitches fail because of wild valuations that infuriate and alienate potential backers.
An overblown company valuation that can’t be substantiated will damage your credibility. Once you’ve lost the trust of your would-be investors, they’ll likely move on to the next business opportunity. So, getting your valuation right from the start is vital if you want your Fundraising Journey to be successful.
It’s easy to get carried away with the excitement and opportunities surrounding your idea. Understandably, you want investors to see the potential of this new venture. However, when you present them with the valuation of your business, it must be realistic. No investor is going to pay over the odds for equity in a startup when the figures don’t add up. They will demand to know how you arrived at your valuation and want to see solid assumptions of what they can expect in return.
A good pitch includes the winning combination of an inspiring vision full of potential, a clear strategy for commercial success and a justifiable valuation of the business right now. In the same way as you’d be cautious about giving too much equity away in early funding rounds, so too will your potential investors be concerned about stumping up more than they should for your shares.
Present them with a valuation that makes commercial sense, and you’ll put yourself in an excellent position to win their investment.
Five ways to value your business
There are five tried-and-tested methods you can use to value your business. Take a look at each one and decide which works best for you.
#1 The Berkus Method
Angel investor David Berkus’ infamous valuation method (updated in 2016 to reflect the changing landscape for investors) is well-respected among the investment community. The method he deploys is reserved for companies that have the potential to hit $20 million gross revenue (approx. £15.3 million) by year five of operation.