Valuating my startup business

Discussion in 'Starting a Business' started by kiamalik, May 28, 2011.

  1. kiamalik

    kiamalik
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    I have a new, very innovative startup company that's in it's initial develpmental stages. I've told very few people about it (haven't even told family) and from those few I already have some solid/serious investment offers on the table. Seeing as we're a new company that will be going after a confirmed untapped target market in a $21B industry the growth potential is tremendous!

    As I begin to enter into conversations with these investors, how do I valuate my new startup with no current revenues? I need some sort of number to calculate what their investment would mean in ownwership percentage of my company and be able to gauge if I'm OK with that number. I've done quite a bit of research and have come across a lot of information but the best info was geared more for companies already doing business. If someone could assist and/or point me in the direction where I could receive some assistance it would be appreciated.
     
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  2. Fergal

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    Welcome to Business Advice Forum kiamalik, thanks for joining. If you are taking significant investors on board you should get some professional accountancy advice to help you with the company valuation and with drawing up an agreement for those investors. Is that something you plan on doing?

    If you've completed financial forecasts for the company you would base its valuation on those. This valuation would be based on the expected return that your investors will receive from their initial investment. Have you completed financial forecasts and a business plan for the new business?
     
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  3. kiamalik

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    We will be seeking assistance in generating agreements for the investors. Have not looked into any agencies that could help with a valuation. Any referrals would be appreciated though.

    We have done a business plan and forecasts but since there are no other companies currently in the market similar to ours there really isn't a model (financial or otherwise) we can use as a reference. As a result, our valuations are very subjective with really no way to substantially support/disprove the numbers. I've tried looking at companies' valuations that offered services that were somewhat close to ours and those numbers were all over the spectrum. I'm trying to find a way not to under value my company (thus potentially giving too much in return on investments) while not seeming like an idiot for throwing a valuation out there that they may seem to be completely ridiculous.
     
  4. Fergal

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    kiamalik thanks for replying back, can you tell us what state or country the business will be based in?

    If there are no companies that are the same as the business you are planning, you could look to other companies in the same industry or that target the same market that you will be going after, as the basis of your valuation.
     
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  5. kiamalik

    kiamalik
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    I'm in the US and is also where the business is based.

    I have looked at several businesses that were similar but the valuations were all based on established businesses. In addition, these valuations ranged from $300,000 all the way to $2,000,000. My task is trying to figure out where my business fits in this range or if it even does.
     
  6. ArcSine

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    If you want to go the DIY route, Aswath Damodaran's site is good place to start. Prof. Damodaran's name is always included in any discussion of corporate valuation, particularly wrt to tech start-ups. Check out his home page here; on the left click on Research & Papers; on the resulting page go down to the listing of individual PDFs and look for the fifth one down "Valuing Young and Start-Up Companies".

    Much further down that same list, look for the one titled "The Dark Side of Valuation", which also focuses on pre-earnings start-ups.

    Caveat: The do-it-yourself approach will be efficient for you only if you already have a basic financial math background. Otherwise, opt for a professional valuation advisor, as the fee you'll pay him/her will be significantly < the earnings you'll miss out on by diverting large quantities of time away from your primary activity, trying to get up to speed on valuation fundamentals.

    As you're Googling around you'll likely run across some simplistic rules of thumb for pricing pre-revenue tech firms. They can be useful for getting a very rough idea as to your own valuation range, but that's where their usefulness ends. Don't cut a deal with investors based solely on any broad-brush rules of thumb, as you'll very likely leave a lot of money on the table unnecessarily.

    A hearty congrats on your venture, and best of luck with it!
     
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  7. kiamalik

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    Thanks Arcsine for the information. I'll definitely check it out!
     
  8. jackflaming

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    Sorry I am giving my advice very late. If you are going to talk with investors, you must consider some points. First of all, take advice from anyone who already have experience in this, Show your investors the best things of your company and how bright is your company's future and what benefits they can have by investing in your business.
     
  9. Mark T

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    Guidelines will depends on where you offer your product, and what kind of business are you going to pursues. Many states and countries have their own business requirements and mandatory certifications to allow them to regulate those legal businesses in their own jurisdiction.

    You can always check out requirements for a being a legal business on your state or locations' trade and commerce commission or related department.
     
  10. Henry Peters

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    You can take advice from the people already indulge in the business in your area because every location have their own business requirements. you can also search for the business requirements online. There are so many business sites available on internet to provide prior information to start up a business.
     
  11. Krisz Rokk

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    Fergal made a very good point kiamalik. Look for branches, niches that serve the same target audience your business does. It's crucial for the evaluation.
    You definitely need a business plan and a financial estimate (report, indicators).

    A few tips:
    1. Have you looked for grants? I was recently on a trip to Australia and a Venture Capitalist I was talking to told me that the Australian Gov. gives away over 22 million AUS for SME every year! I'm sure the US has similar funds.
    2. Talk to bankers to find out what exactly they are looking for when giving loans. I'm not saying to get a loan from them - but it's good to have a chat and see what they're looking for when doing evaluations. These guys have tons of good statistics and surveys. Maybe you can obtain some valuable information about other markets that serve the same customer base.
    3. Speak to Venture Capitalists and Angel Investors. Have you heard of CEO Space? They have some amazing conferences for entrepreneurs with loads of key influencers. You can check them out at: http://ceospaceamerica.com/
     
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  12. derrickfowler

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    I have read this post and replies just now and I have got answers of many questions, many thanks to you all. I had questions in mind but most of them are answered here. thanks again :)
     
  13. AndreJ

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    Please visit, 101 business insights is dedicated to helping you solve business problems holistically, self-serve or with the help of a specialist.
     

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