It’s commonly said that business valuation is more art than science. If this is true, then the practice of valuing a startup business is squarely in the domain of the artist.
Nevertheless, entrepreneurs need to put a value on their startups in order to raise money, and investors need to put a value on their investments to generate liquidity. Since neither entrepreneurs nor investors are known for right-brain artistic thinking, this article aims to provide some tips for left-brain thinkers to make sense of startup valuation.
Putting a value on your pre revenue start-up is like climbing Mt. Everest without a guide or equipment. Every start-up at some point must put a realistic value on their company whether it is for a competition, an investor, even if it just to have a the number into your pitch deck. When you have no revenue or prior investment, no benchmark or backup your number doing the math feels like a sham. Often entrepreneurs will either under-value (very rare), over-value (most of the time) or just ignore the whole exercise. If you fall into the latter category, shame on you!
The truth is putting a value on your company for the purpose of investment is usually the very last thing most entrepreneurs think about, so you are not alone. Feel better? When entrepreneurs finally get around to calculating the value of their venture it is stressful. The net result, valuation is the area of the business where the least effort is applied and the one that is most necessary. I’ve been there… I hated it.
In this video, Rachel Proffitt and Todd Carpenter from WSGR, answer startup legal questions. Also, tell us about absolute legal must-haves when bootstrapping a startup (and what can wait…), the convertible note versus series seed stock conundrum, the tricky business of firing your co-founder, determining the valuation of your company, and more!