What is the company worth? It is one of the most common questions among founders looking for capital. The answer depends on many factors, including how you communicate with investors. Different types of investors also value startups in different ways. Some put a high value on strategic assets, while others prioritize early cash flows.
Here are some of the factors that affect the value of a startup ahead of an investment.
The credibility of the team
Putting a value on a startup is by nature speculative. However good everything looks, there is almost always a high level of uncertainty around the product, the market and the business model. That is why the credibility of the team is a decisive factor, and perhaps the most important one. Credibility can be shown through, for example, previous experience, persistence and a convincing execution plan. The personal chemistry between founder and investor is also often decisive, which makes meeting in person very important.
Traction
Traction describes how firm a foothold the company has gained in the market. Many see paying customers as the strongest sign of traction. It shows as clearly as possible that the product works for the target group and that there is a willingness to pay. For product companies it can therefore pay off to start with a minimum viable product (MVP), a first version with just enough features to be tested by real customers.
Sometimes capital is needed before there can be paying customers. Then you work with what you have, for example statements from customers you have met, a letter of intent with a potential partner, a development agreement with a larger market player, or simply a stronger case on the other points.
Revenue
Young companies have rarely built up more than a fraction of their potential revenue, but the numbers still matter when a startup is valued. Often it is about showing future projections that feel both realistic and attractive. Here, too, it is important to present a credible execution plan and to show that the team will have the right people to deliver it.
Different investors read numbers differently and give them different weight, so it is worth finding out early what return the investor you are talking to expects, and making sure your projections address it.
Business model
The business model matters both for how innovative it is and for how well it fits the market. Companies are also valued with different methods depending on their business or payment model. Companies with more traditional business models are often valued on a multiple of EBITDA, that is, operating profit before interest, taxes, depreciation and amortization. SaaS (software as a service) companies, on the other hand, are often valued on a multiple of their annual or monthly recurring revenue, before costs.
Market potential
When a startup is valued, the market potential shows how large the company could become if it really succeeds. This matters to many investors, since the companies that succeed need to make up for those that do not, and also deliver a high return for the portfolio as a whole.
Competitive advantages
Competitive advantages can take many forms. A strong one is solid IP protection, but it can also be specialist expertise, market rights of various kinds, major contracts, strong market access or a proven ability to innovate.
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