HOW TO: Accurately Value your Startup
At some point during the startup process it may become apparent that growth is happening rapidly, and your current resources are either exhausted or are insufficient to handle the increased load. From this point you have a few options.
1) You can continue to overwork yourself, your team, and your resources in an effort to manage the exponential growth (keep things as-is).
2) You can continue to overwork yourself, your team, and your resources while funneling all incoming cash to expand and accommodate growth (keep it bootstrapped baby).
3) You can bring an investor on board who will assist in procuring the resources and team members needed to take your business up a notch to the next level.
Let’s pretend you chose option #3. Pitching an angel or a VC on your current project is a highly involved process and many components are necessary in order to successfully raise enough money. Luckily for you we are’nt going to look to heavily into the logistics of creating an all inclusive investor pitch. Instead, let’s focus in on accurately conveying the value of the company to an investor. Accurately valuing a startup is perhaps one of the most essential tasks a fundraiser can complete.
Value your startup to high, and the VC is on their way out the door chuckling. Value your startup to low, and the VC will buy in chuckling – knowing that you (the company) are getting shortchanged. Value your startup accurately, and you will have a nice mutually beneficial agreement in which you both leave chuckling knowing that you are both going to make bank together.
A number of different accounting methods are available to businesses looking to compile a valuation. The problem with most methods is that they are not mutually inclusive, meaning that some cover areas that others don’t and leave potentially critical information out. The method I have found to be most useful and all-inclusive is the VC Method. Ryan Junee of RyanJunee.com wrote up an excellent extensive guide about the VC Method of Startup Valuation. The guide was written in 2006, but still remains true and valuable for business owners today.
In describing this method I will start with a simple scenario of a company that takes only one round of venture financing, and then show how this method can be expanded to handle multi-stage financing. Terminal Value
The first thing we need to calculate is a ‘terminal value’ for the company. That is, a value at some point (say 5 years) in the future. This point may be an expected liquidity event (IPO or acquisition), or failing that should be a point where the company is at least…Read Full Article
I am a 15 YO entrepreneur and I am seeking to understand how to take my business to the next level. I have bootstrapped my way until now and I am needing guidance on how to move forward. If you can assist with some guidance on VC or microfunding I would appreciate it.
My business is http://www.dropyourreins.com
I have a experiential leadership and training company using horses.
Thank you
Danielle Herb
Danielle,
Thank you for the comment. I see that you are in a unique situation here. I will send you an email later today with a few suggestions. I will also post them here so that others can see them as well.
Danielle,
Without knowing a bit more about your business and seeing some of your different strategies for the future, it is difficult to give the “right” adivce. However, after looking around at your website and your business you seem to be off to a good start. So, based on what I have read about and seen of your business here is what I would do.
First, read this article (http://thestartupist.com/2009/08/find-startup-f...) to see if any of the options may apply – pursue the ones that do. Based on the type of business you are running, angel/VC funding may not be your best option.
Second, don't stop bootstrapping. Break down your funding into sections depending on what you need and when you will need it. Focus on raising money for your immediate needs, and then raise some more as it becomes necessary. To raise small amounts, try LendingClub or Prosper.com.
Third, you seem to be off on a good foot already with your call to action for donations and support. Actively step up your efforts and solicit donations via social media and your personal network offline. Your business is service based, and addresses something which many people can relate to. Craft an effective “ask” and pitch it to everyone you know.
Fourth, actively pursue sponsors to underwrite parts of your business costs in exchange for advertising space on brochures, your website, horse trailers, video tutorials etc. You can take this one as far as you want – it just depends on how you think your target market will react to the sponsors you have accepted.
Thanks for the comment Danielle, and be sure to keep us posted on your progress!
-Ethan
Danielle,
Without knowing a bit more about your business and seeing some of your different strategies for the future, it is difficult to give the “right” adivce. However, after looking around at your website and your business you seem to be off to a good start. So, based on what I have read about and seen of your business here is what I would do.
First, read this article (http://thestartupist.com/2009/08/find-startup-f...) to see if any of the options may apply – pursue the ones that do. Based on the type of business you are running, angel/VC funding may not be your best option.
Second, don't stop bootstrapping. Break down your funding into sections depending on what you need and when you will need it. Focus on raising money for your immediate needs, and then raise some more as it becomes necessary. To raise small amounts, try LendingClub or Prosper.com.
Third, you seem to be off on a good foot already with your call to action for donations and support. Actively step up your efforts and solicit donations via social media and your personal network offline. Your business is service based, and addresses something which many people can relate to. Craft an effective “ask” and pitch it to everyone you know.
Fourth, actively pursue sponsors to underwrite parts of your business costs in exchange for advertising space on brochures, your website, horse trailers, video tutorials etc. You can take this one as far as you want – it just depends on how you think your target market will react to the sponsors you have accepted.
Thanks for the comment Danielle, and be sure to keep us posted on your progress!
-Ethan