Startups all, struggle with a question of what’s called, “valuation.” What is the company worth? To put together a pitch deck, negotiate terms with investors, or just to share with potential team members and advisors what you’re doing, people will want to know what it’s worth now.
Before you take money from a venture capital firm, you’ll agree to a valuation and that valuation will also affect how much of your company you continue to own, depending on how you part with shares of the company in order to raise that capital. Being prepared to discuss your valuation, appreciating what is considered, and understanding how it works, is more important that figuring out a precise value, so let’s explore an easy way to think about valuations.
Cutting to a chase… valuation is in many respects more art than science.
Particularly early, it’s a matter of perspective and opinion. There are some patterns and norms that have emerged over the years, and as founders seek to learn how to make sure they’re at least in the right neighborhood, how do we make sure we’re roughly right?
Accounting for Revenue
That vaunted of startup metrics!
Everyone talks about revenue as if it’s the most important thing in the world. Here’s the trick, a new business, with a known business model, can certainly argue that it should have revenue whereas a “startup” without a known model, frankly can’t. All this talk of revenue is misleading and you should be empowered to reply confidently to an advisor/investor who asks about revenue, “ WTF do you mean revenue?? “
Here’s how and why.
Revenue actually isn’t typically factored heavily into “startup” valuations because startup means you don’t know the business model yet (you’re still figuring it out); revenue is just an indicator that you can sell something of value… not necessarily create a fundable company.
That is, for example, service based businesses start all the time and drive revenue, heck, place a phone call and you may be able to “start” something right now that has revenue.
That neither a “startup” nor fundable company makes