Any entrepreneur who is thinking about fundraising has to be prepared for the unavoidable investor question “What is your startup's valuation?” This question becomes increasingly difficult when posed to early-stage entrepreneurs who are usually asked another equally difficult follow-up investor question which is “How did you come up with your valuation?”
Experienced entrepreneurs know that the answer to such a daunting question does not lie in a particular magical number, but instead the answer that investors would like to hear from founders relates to the method/s that the founder has employed to reach the claimed valuation.
The ideal answer to such a question would actually be to relate that several structured valuation methods were used to establish the startup’s target valuation.
The rationale underlying the use of valuation methods, such as the Scorecard method or the Risk Mitigation method, is that it helps entrepreneurs and investors alike answer key questions such as:
How much experience does the founding team have?
How much money has been invested so far?
How does the startup compare to other startups in the industry segment?
How big is the target market?
How have similar startups been valued?
By using multiple valuation methods, startup founders and investors can properly prepare for valuation negotiations and truly illuminate the progress of the startup, the capability of the founding team, and ultimately a good target value for the startup.
Given that early-stage startups do not have any historical financial data that can be used to calculate the value of the startup, investors focus on the value derived from the startup’s qualitative aspects.
The most well-known methods used in valuing early-stage startups are Checklist Method, Step Up Method, and as mentioned above Scorecard and Risk Mitigation Methods.
Startup Falcon’s AI-powered, automated valuation calculator was built based on the logic of these methods. The specialized valuation form that investors/entrepreneurs fill on their online platform inspects the quality of such qualitative aspects of the startup as the ones mentioned above (quality of the founding team, past investments, target market size, similar startup valuations, and more).
Their engine then quantifies the qualitative answers from the form to determine the final valuation amount per valuation criterion (team, product, business model, legal) and per valuation method. Providing both investors and entrepreneurs with a valuation they can use with confidence.
Stephen R. Poland, the author of Founder’s Pocket Guide: Startup Valuation