Tue, 13 June 2023
Valuation Methods To Consider
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
In preparing your fundraise you need to consider your current valuation even if you’re using a SAFE or Convertible Note.
There are several methods to use to estimate your valuation.
The most often used method is comparables.
This method looks at similar companies that recently raised funding and uses that as a proxy for your startup's valuation.
It can be a challenge to find companies that fit exactly but if you generalize into tech, healthcare, consumer product goods, etc, you can find comps for your startup.
You can also use the rule of four which gives your startup a $1M valuation for each of four points: sales, team, product, and intellectual property.
Give your startup the full $1M if you have each category fully developed.
If it’s less than fully developed then give your valuation a portion of it.
For example, if the product is fully developed and ready for the market then it’s $1M.
If on the other hand, it’s in beta form with some functionality then give your valuation $500K.
Add up all four numbers to calculate your valuation.
There are other methods such as the Berkus method which uses a scorecard and the venture capital method which looks at the exit price and works back to your current valuation.
It’s best to try several methods to see which one puts your business in the best position.
In the end, valuation is a negotiation and not a formula.
No matter what valuation you propose the investor will challenge it so make sure you have solid evidence of your proposed number.
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