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Business Valuation for Startup Companies
Do I need a business valuation for my startup company?
While it is helpful for investors to know the estimated value of your business, it isn't necessarily the dominant reason why an investor will invest in a startup. Quite often, convincing an investor is more about negotiating, convincing, and being passionate and bold about your business idea. Investors need to know that you, as a business owner, will do everything you can to make the business work.
Do startups need a high valuation to be successful?
The success of a startup doesn't rely on it receiving a high valuation, and in some cases it is better to not receive a high valuation. When you get a high valuation for your seed round, you need a higher one for the next funding round, meaning that a lot of growth is needed between rounds. A good general rule to follow is that within 18 months a startup will need to show that it grew ten times. This is usually achieved with one of these strategies:
1. Go big or go home
A startup raises as much money as possible, at the highest valuation possible. It spends that money to encourage as much growth as possible, and as quickly as possible. If successful, a startup will have a much bigger valuation in the next funding round, allowing this “seed” round to pay for itself.
2. Pay as you go
A startup only raises the money that it needs, spending as little as possible, while aiming for steady growth.
Two biggest common mistakes
1. Assuming a value is permanent, or always right
Startup valuations are based on predictions. When it comes down to it, a startup is worth what an investor is willing to invest. A startup business owner might disagree with an investor's valuation because their own valuation is different.
2. Assuming a value is straightforward
A business valuation uses several underlying assumptions. A valuation is never straightforward for any company. The value and assumptions are constantly changing. There are so many factors, including risk issues. For a startup valuation this is even more true, because actual numbers are not there yet.
It is best to discuss these issues with the potential investor so that the business owner and the investor agree up front.
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