About 18 months ago, Crowdcube asked me to write an article on how to value your start-up, which I duly did. It was published and I pretty much forgot all about it.
Imagine my surprise then, when CrowdCube dropped me a note to say the article had had 14,000 views. They were impressed (I think “awesome” was the exact phrase!), and so was I.
Stepping aside from self-congratulatory indulgence, it’s perhaps not as surprising as you might think. Valuing your start-up or early stage business is one of the most important elements of any investment raise – be that crowdfunding, angel investment or a private equity round. Setting the wrong valuation will deter potential investors just as sure as setting the right valuation can attract them.
What’s more, as a young business, knowing how to value your start-up is one of the trickiest elements of an investment round to get right. If start-ups had the stable and predictable revenues of more established businesses, there are lots of clever accounting and corporate finance tools that can be used, but none of these apply when you have fledgling or fast-changing revenue streams.
So how do you value a start-up?
Here’s 6 key pointers to get you started
Be pragmatic
Recognise that too high a valuation will close conversations with potential investors even before they have begun. Conversely, setting a valuation too low may mean you sell more equity than you actually need to. Start by identifying a realistic range within which your valuation will gain consideration from investors.
Do your research
Conduct some bench-marking research to identify other businesses at a similar stage to yours that have recently raised investment. What was their valuation? Crowdfunding platforms can be very helpful when collecting benchmark data since the valuation is more public than for private deals. Use the data to develop an upper and lower range for valuation.
Evidence your valuation
Identify “proof points” – things you have already achieved – which substantiate your valuation. The best proof points are things that create value in your business such as having developed a product that customers are raving about, having found a proven route for attracting new customers and being able to show revenues.
Listen to feedback
Valuing start-ups is not an exact science. It’s more of a negotiation. Start by testing your valuation with trusted advisers, fellow founders and friendly investors. Listen to their feedback and use that to get a feel of whether your valuation is in the right ball park – or not!
Be ready to negotiate
Even when you have arrived at a sensible starting point for valuing your business, don’t just expect investors to accept this. You can be pretty sure they will want to negotiate. Be ready with tangible evidence (of other similar investment raises, of your proof points, etc) to justify your valuation. Don’t be afraid to ask potential investors to justify how they arrived at their (different) valuation – be that higher or lower. Use all your negotiation skills to reach agreement
Secure a lead investor(s)
It is easier to settle on a valuation as “definitive” once you have a lead investor(s) ready to invest at that valuation. Once you have secured this, be sure to mention to other potential investors that you have a lead investor(s) backing the round at this valuation. (For tips on how to secure a lead investor, read “How to find cornerstone investors”)
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FAQs on Startup Valuation
Why is valuing a startup important for raising investment?
Your startup’s valuation directly affects investor interest and the amount of equity you give away. A valuation that’s too high can put investors off before discussions even begin, while one that’s too low means you may give up more ownership than necessary. Setting the right valuation builds confidence and helps attract the right backers.
How do investors typically value early-stage startups?
Unlike established businesses, startups don’t have long trading histories or predictable cash flows. Investors look at benchmarks from similar businesses, traction (such as customer growth or revenue), proof points like product validation, and the founding team’s credibility. Valuation is often part research, part negotiation.
What is the best way to benchmark my startup’s valuation?
One of the most practical ways is to research other startups at a similar stage that have recently raised investment. Crowdfunding platforms are especially useful because their valuation data is public. Compare businesses in your sector to establish an upper and lower range for your own valuation.
How can I justify my startup’s valuation to investors?
Back up your valuation with evidence. Highlight proof points such as a strong product that customers love, a proven route for acquiring customers, revenue growth, or key partnerships. Tangible results carry more weight than projections alone when convincing investors your valuation is fair.
Do I need a lead investor to set my valuation?
Securing a lead investor makes it easier to establish your valuation as credible. Once a lead commits at an agreed valuation, it signals confidence to other investors and helps bring the round together. It also reduces negotiation friction since others know a professional investor has already validated the valuation.
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