Valuation & Investment fundamentals for startups

Valuation & Investment fundamentals for startups

All these topics and more are covered in this week’s show plus read the show notes below.
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This weeks ‘Disruptive Entrepreneur’ Building Your Business Show notes:

The Kipling and Kirby Ventures Disruptive Entrepreneur Series Episode #29 ‘Building Your Business’ Part 10 : The Valuation and Investment Opportunity

What is a company valuation?
To quote Wikipedia Business Valuation is defined as: a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to affect a sale of a business.

Essentially, the valuation is the price at which someone is willing to pay to invest in your business

Why is a valuation of your startup important?
As a business owner you need to understand how much your business is worth. When starting up or seeking investment, being able to quantify this and communicate this clearly in your business plan is important

How would you go about calculating your valuation?

There are several methods:

The Discounted Cash Flow – DCF – method: this estimates valuation based on future cash flow, which is discounted back to the present day, the father out you go the bigger discount you have to place on the valuation

The Multiple Market method: More popular, this doesn’t look at cash flows, instead it looks at the businesses in the same sector that have recently sold and compares this to your position, taking into consideration sales, revenue and earnings

There isn’t a right or wrong method for calculating the valuation, however it is important to make sure that your valuation is realistic so that it makes you credible to an investor, wild valuations and crazy figures can put people off.

As we have mentioned before on our BYB series, things like this need to be constantly measured, as you are more sure of your figures, then your valuation becomes more accurate

What does an investor look for in early stage startups?
It’s not an easy question to answer, as it depends on the investor, do your research about what drives the investor, are they more interested in the financial return, are they doing this for tax reasons? Are they an investor in your sector or passionate about particular products. Appeal to them personally and do you research

Watch for some signs that your startup may be able to raise more easily, for example your sector may be particularly hot, eg IoT and AI startups are attracting lots of attention, you may have an amazing team, which can show the investor good faith that you have the talent to execute your business plan. It helps if you have a functioning product or at least a demo or MVP, and if you already have traction – in other words, your company is already showing signs of revenue.

Stack the deck in your favour so that investing is easier for any potential investor out there

How do you ensure your company is a good investment opportunity?
It’s like a recipe, the better the ingredients, the more chance you have of making a better dish. To present your company as having the best investment opportunity, ensure you have your figures right, your valuation, cash projections, sales figures and growth, but it also is important to have a great idea backed by a great team, which we cover next week. Of course, the further along you are as a business, the better, a pre-money start up is a much higher risk than a startup that has already made revenue is a much better bet. Investors look at risks. Later on in this series we will look at targeting investors

Al’s Final thought: ‘To invent, you need a good imagination and a pile of junk. – Thomas Edison’ Shared by Julian Hall @theultrapreneur via Twitter

Note: Each week, Kipling & Kirby Ventures, the Startup Incubator that TepFu founder Al Tepper co-founded with Simon Barry, publishes a podcast (The Disruptive Entrepreneur) and currently we have two parts each week: The Weekly News & The Building Your Business Series. We will post the show notes after each show in iTunes of course but I shall also publish them here. Do listen and subscribe. It’s cracking value.

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