Wed, 1 June 2022
Justifying a Startup Valuation
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
Startup valuations differ from standard valuations in that they don’t solely rely on expected cash flows, book value, or other tangible aspects of the business.
Intangibles such as quality of the team, intellectual property, product status, and customers are the driving factors.
Most angel investors want 25% of the equity for an initial round of investment.
In addition, they want to have a say in the business through a board of directors or advisory role.
To justify your startup value, focus on articulating the values that are already in the business as follows:
Highlight the team you have built so far and their experience.
Show what the team is doing to make the company successful.
Show the current product development and highlight what has been done so far.
Outline the intellectual property you have, including provisional patents.
Make sure you file your provisional patents in advance of launching a fundraise so you can point to having patent-pending technology.
Always note customers even if they are not yet paying for your product.
If you do have some revenue use it to prove market validation showing customers will pay for it.
Customer involvement will generate a higher valuation.
If you cannot sell the proposed valuation for the raise, consider cutting the fundraise target in half.
While the valuation will be the same, the risk will appear lower.
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