8 Critical Factors for Valuation of your Startup
A Thought Leader Guest Post from Dr. Fred Haney, Author of The Fundable Startup:
8 Ways to Build Value in Your Startup 
The concept of value is extremely elusive for startup companies.
How is a startup company valued and how is value created in a startup? One reason the concept of value is so difficult is that it lies in the eyes of the beholder.
Imagine a stack of startup company business plans or pitch decks complete with their visions, plans and financial projections. The best way to “calculate” the value of a startup company is by estimating the “net present value of the projected cash flows.” This is a spreadsheet exercise that involves using five-year revenue, expense, and cash flow projections and a pre-determined risk factor (discount rate) to estimate the “net present value” of the cash flows and an expected “terminal” value of the business.
Most of the startups in our stack will have about the same net present value—somewhere around $2-4 Million.
So how do we sort out the “real” value of these startups?
“Real value” is in the eye of the beholder, or in the “mind of the investor.”
If an investor believes the projections and is willing to write a check, then the “value” of the company may in fact be $2-4 Million. On the other hand, if no investor has enough faith in the projections to write a check, then the “value” is zero.
So, how do you create belief? For one thing, seeing is believing. So, creating a product, making a sale, hiring a team, managing a team successfully all are ways of creating belief. If it’s not possible to “see “a result, then the next best approach is to make a logical, plausible, supportable argument. This of course is the stuff of business plans.
Here are 8 components of the NPV calculation that make up the “real” value of a startup.
Let’s look at each and see how your startup can create specific value.
- Team
- Product
- Sales and customers
- Costs and expenses
- Profits
- Management
- Cash flow
- Partners
“You need to surround yourself with quality human beings that are intelligent and have a vision”—Vince McMahon
Team
Investors like to see the initial team so they can decide if they believe the team can “pull it off.” This doesn’t mean that all the C-level executives have to be identified. It’s probably better if the initial team is focused on development of the company’s initial product. So, investors will want to see developers who have previous experience in creating similar products. The means by which the initial team is compensated will influence investors as well. High salaries will be a turn-off. Equity compensation will impress.
Every once in a while, a new technology, an old problem, and a big idea turn into an innovation—Dean Kamen
Product
By “product” we mean the entire package of the problem the company is solving, including its product concept, and the extent to which the product solves the problem in a cost-effective way. The best way to create “product” value is to build the initial product in a manner that demonstrates that it works, that it solves the intended problem, and that it can be made for a cost that will permit the company to have a profitable business model.
“Make a customer, not a sale.” – Katherine Barchetti
Sales and Customers
“The proof is in the pudding.” Nothing is more convincing to investors than happy customers. Anything a startup can do to demonstrate that customers will purchase their product at the planned price will greatly add to the starup’s value. It’s also important that ...
Read the rest of this article at TheFundableStartup.com…
About the Author
Thanks for this Guest Post to Dr. Fred Haney, the Founder and President of the Venture Management Company, a firm that provides assistance to high tech companies. He is the author of The Fundable Startup: How Disruptive Companies Attract Capital, published by Select Books of New York.
Download the first chapter free here.