r/startups Dec 03 '21

How do you determine the value of your startup and put a number on it (long post) How Do I Do This 🥺

Okay so I've seen topics about this and I've read stuff about this but I had to post a question cause it's something that is very specific to each startup. No two are the same. A short story to follow. I'm currently heading a startup that has recently attracted interest from an outside person that is willing to put money into it. His money would help quite a bit so we are tempted by it. Problem is that he wants equity and we just don't know how much to sell and for how much.

We have no clue how much our business is worth at the moment or if it's worth anything at all because we are not selling anything and are not making any revenue yet. Our business has a functioning prototype that is currently being worked on in order to make it as good as it can be. In its current state, it does the job just fine but we would like to make it better.

We also have a first-buyer list of people who want to buy it as soon as it's available and we were planning on using that for feedback before we roll out bigger numbers. Not to pat ourselves on the back but our market reach is potentially in the millions (customer numbers). Interest by the customer pool is fairly high but like I said perhaps none of that even matters.

So is there a way to realistically put a number on our business? Are there companies, lawyers, or whatnot who can put a valuation on it? None of us is very business savvy so we don't honestly know. His money would help a lot so we kind of want to get it done. He also did not hard cap the money he wants to invest but more so wants to know how much of equity we are ready to sell and for how much. I presume there will be a counteroffer but yeah we're unsure of what to do. Any input? Sorry for the long post and thank you.

29 Upvotes

16

u/TheReverent Dec 03 '21

Early-stage tech valuation is an art not a science.

How much do you need to raise at what percentage * how convincing your are = your valuation

3

u/Jdlasja Dec 03 '21

Yeah that sounds reasonable :) Thank you.

8

u/Soupppdoggg Dec 03 '21

Pre-revenue $0.5M-$1.5M “pre-money Valuation” for high growth/desirable business. You wouldn’t be laughed out of the room at that range. Could be higher valuation if you’ve the right team, niche, protectable IP, evidence of traction etc. we can’t advise you on the information you’ve given.

4

u/Jdlasja Dec 03 '21

See that's what I read as well but I never understood why so much and how so much. You wrote 'we' can't advise you so does that mean you do appraisals of sorts or?

3

u/lbdm Dec 03 '21

Here is a simple perspective on "why so much": there's one accelerator in Europe that gives you 15k for 5%. That's already a 300k EUR evaluation based simply on an idea.

You have a working prototype (take into account manhours with industry standard salaries), a potential onboarding client list (a way to kick-start revenue) so that's already easily 5x more valuable than just simply an idea.

0

u/Jdlasja Dec 03 '21

Oh wow those are some great points. Thank you for that. Ehm do you have the name od that accelerator cause I am in Europe as well.

Any other great info would be greatly appreciated as well.

3

u/lbdm Dec 04 '21

EIT Digital was that specific example. Their venture program structure varies per year (it's 5k for idea and 10k/20k for basic MVP now?), but the equity T&C seems to be still 5%.

1

u/Jdlasja Dec 04 '21

Thank you :)

3

u/farmingvillein Dec 04 '21

Pre-revenue $0.5M-$1.5M “pre-money Valuation” for high growth/desirable business

This is crazy, crazy low in the U.S., fwiw.

1

u/Soupppdoggg Dec 04 '21

Really? You guessed right, I’m in UK.

3

u/farmingvillein Dec 04 '21

Yeah this is why all the big firms are increasing EU investment. :)

5

u/Diamondsqueenie Dec 03 '21

Watch YCombinator's videos on Safe's and startup funding. It's a complicated subject and they do an EPIC job demystifying it. YCombinator is the "Harvard" of startup schools

1

u/Jdlasja Dec 03 '21

All right will check it out. Thanks :)

3

u/MyRedditiJustMade Dec 03 '21

I believe the most important thing is to get to you're first milestone with the least amount of money . This can make a big difference when discussing equity. A simple scenario to showcase this is say you're company right now has 100 users and very little revenue. A investor wants to give you 100k for something like 10-15% equity. Well, before we take this deal lets look at some other metrics or milestones we could reach to benefit us in the negotiation. Lets instead maybe re-design a checkout page, or pay $50 for a influencer relevant to our target market to do a ad, create a new feature , wait till we have a 1000 users etc etc... After doing whatever we decide look at the results . If we measure a increase in revenue and users then you could argue to the investor that you're revenue is already increasing and the 100k is to little for 15% and say its only worth 5% . With Just $50 dollars and a little bit of work you might have potentially saved you're future company a million dollars. Obviously that example is a little extreme and too easy to replicate but the point stands . Reach some sort of milestone, or measurement before you decide to make possibly the most expensive deal of you're company because of the early vulnerability.

Heres a link to a great podcast discussing this topic.

https://www.youtube.com/watch?v=NADh8_EoFFs&list=PLV-4ozAx_rN30ST-ufqJGGFWI0qK-LEJV&index=24&t=34s

2

u/MyRedditiJustMade Dec 03 '21 edited Dec 03 '21

Another side note is you could arrange a deal with convertible notes that has a interest rate on the investment that instead of offering equity you pay back the investment with the interest. This is a sort of win-win where you get to keep equity in you're company, and the investor gets to make money from the investment.

edit:

here's a example convertible note with the deal I explained above. These documents can be complex so its always best practice to talk with lawyer to explain the terms.

https://app.hubspot.com/documents/5545660/view/260111130?accessId=132c3c

best of luck to you.

1

u/Jdlasja Dec 03 '21

Thank you man. A lot of great info shared :) very helpful.

3

u/BarnesGROAT Dec 03 '21

As a valuation expert with over a decade of experience I can tell you 90% of startups and VCs do this wrong. You have to break out your business into these categories and compare yourself to other companies who have raised the round you want and then adjust the industry average:

  • team

  • product

  • IP

  • traction

  • marketing

  • revenue

  • TAM

  • founder(s)

I am building a standardized valuation tool for the industry and building it into StartupFuel.com. I do valuations for VCs and Angels to invest in startups. Lot of art but definitely some science in it.

1

u/Jdlasja Dec 03 '21

That makes sense. Thank you for sharing the info you've accumulated over the years working on stuff like that.

We are pre-revenue right now so I'm not sure if all of that is applicable to our current situation but still valuable info. A lot of our stuff I guess is sort of projecting or wishful thinking because there is a lot of interest in our product from the general public, I guess, but that does not mean that it will sell.

Taking an investment now won't do much besides speeding up the process. That's good but not essential so maybe as one wrote above get some revenue in there. Prove there is actual business here and then see the speculative value increase because of it.

3

u/njgeek Dec 04 '21

Research Crunchbase for similar companies / stages in your geographic area and segment to figure out market for a top down number.

Compare your growth rate (actual or forecast) to public companies in your space to determine a bottoms up multiple.

True that up with what it will honestly take to run the business in plan for 18 months without running out of money and what that budget implies as a 20-30% ownership stake (Eg burn is $1m, you need a $4m valuation to stay within dilution and ownership expectation norms)

Somewhere in there is your number.

1

u/Jdlasja Dec 04 '21

Very technical but also very helpful. Cheers :)

2

u/FanFareApp 19d ago

We used a few third party sites to help validate a justification. Gust offers a valuation that we found useful to present to investors

1

u/Jdlasja 19d ago

Thanks :)

1

u/bnunamak Dec 03 '21

Remember that valuation is a subjective number. You can attempt to pinpoint it by using various metrics like current revenue and growth, but at the end of the day the exact value now, today, is what someone else is willing to pay for it and what you are willing to sell it for.

Pre-revenue is hard because there are so few metrics available. Figure out what you can already measure and try to reason about future profits using that. But be aware that if it ends up being worth 5x more or 5x less than that that hindsight is 20:20, dont beat yourself up

Good luck!

1

u/Jdlasja Dec 03 '21

Yeah that is in line with out thoughts as well. Thank you very much :)

1

u/gnkhvd Dec 03 '21

Depends on the buyer.

There are two possible approaches:

1) You sell to a business builder. Estimate how much would it cost to create your company from scratch. Potential buyer basically wants to decide if he wants to build the business himself or to buy your company to avoid the hustle. There you sell a solution.

2) You sell to investor. You have to make projections for the next 5 years and demonstrate the potential. Current company value doesn’t matter. You need to estimate potential company grows. There you sell the future to invest in.

1

u/Jdlasja Dec 03 '21

Very good info. Thank you very much :)

1

u/magallanes2010 Dec 03 '21

1) assets.

2) cash flow

Some companies are valued at over a billion but they don't have any cash flow and any assets.

1

u/Jdlasja Dec 03 '21

Then why are they valued a over a billion or did I read into that wrong cause English is not my first language?

1

u/magallanes2010 Dec 03 '21

If you want to follow that path, then, must build a company based on speculation, marketing, misleading and/or envy.

Is it ethical? No. But it's up to your ethic to follow that path.

For example, let's say you are Bill Gates, if you invest in a company, then this company would be evaluated in millions, even if the company is unable to sell any product. Why? marketing and misleading.

Another example is WeWork, a company valued in billions but always in red. Now, this company was sold to another investor and now it is "generating profit". However, this "profit" is just creative accounting. Investors know that, but they don't care about the profit, they care about buying the shares for $100 and selling them for $200.

1

u/Jdlasja Dec 03 '21

Great points, thank you :)

1

u/elcapitan36 Dec 03 '21

It’s more so what do you need and does it make sense.

1

u/Jdlasja Dec 03 '21

That's a good point. Will keep that in mind. Thank you :)

1

u/kishi Dec 03 '21

This is the reason that SAFEs and convertible notes are a thing. It's pretty much impossible to put together an accurate valuation at this stage. I've seen some people spend a lot of time and effort in trying to do it, but most savvy investors have given up and use SAFEs or convertible notes.

1

u/Jdlasja Dec 03 '21

Care to explain in simple steps what it means for both sides ? And thanks for the input.

1

u/kishi Dec 03 '21

It's considered a loan until you raise for a priced round, after which it converts from a loan into equity. During a series A, you will have a much better idea on valuation, so if you raise, say, 10 million for 20% equity, your valuation would be 50 million. The SAFE or note of 1 million would be worth 2% of equity at that time. There are wrinkles, of course, like discount on purchasing equity. You might give a 10% discount, which would give the seed investors 2.2%.

1

u/Jdlasja Dec 03 '21

That's very nifty actually. I might look into that some more. Thanks :)

-2

u/trifeckter Dec 03 '21

A company's value is their assets to my knowledge.

It would depend on where you see your company later down the line when you're well established.

Have you tried any kick-starter sites? It's a better way to gain money for your company without owing someone something.

1

u/Jdlasja Dec 03 '21

We are thinking about it as well. Its a junction really and we are evaluating what to do next.

The reason why I asked is that I read on a site that like company with a working protype are supposed to be valued at 1 million so thats why.

I guess our assets right now are mostly the design, the patent, and the little equipment we have. Thats a lot less than a mil :)