“Valuation is what you are willing to exchange for something else that you want.”
If you’ve been following along with my blogs, well that’s great. Thank you. If this is your first read then I’ll fill you in. I am currently reading Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson and a ton of different articles here and there on entrepreneurship and angel investing.
This post, in particular, is in response to the book’s section on valuation.
Here again, I want to be able to discuss what I took away from the reading in such a way that entrepreneurs can see angel investing and the many aspects of it from an angle that helps them grow.
Now, the introduction to the valuing section really caught my attention because when I think about the exchange in investing, I always think about money. However, Amis and Stevenson, make the point that it isn’t always money that is on table, or at least not always just money. Your venture is worth more and is more than just cash.
I really want you as the entrepreneur to look at valuing your venture before you ask any investor to place a value on it. What is your venture worth and not just in monetary terms? According to The Angel Investor Report the start-up valuation of your firm depends on a few different things.
Your team and you:
Do you and your team have experience and education that relates to your start-up, how much?
Do you and your team have important skills in a variety of areas?
Do you have the ability and the flexibility to make changes, grow as a person, or shift and adapt?
Do you have a solid business plan, is everyone seeing eye-to-eye when it comes to goals and where the venture is headed?
What is your product/service worth?
Can you grow your product/service, is it scaleable?
Do you have strong and reasonable projections?
Is there profit potential along with growth potential?
Is there existing cash flow?
Do you have a strong understanding of your numbers and data? Can you extrapolate what that data means?
Are you creating a solution for a problem?
Is there a market for your product/service?
Is that market sustainable?
What differentiates your product/service in the eyes of customer?
The industry and the kind of market you are functioning in:
Do you understand your market or industry?
Are there limitations to growth within your market?
What are the industry or market projections?
Who is your competition?
What is your competitive advantage?
What does a future scan of your market or industry reveal?
What are other similar ventures valued at in your industry?
Is the market in your industry saturated?
Is your venture appropriate for its location?
Is there a potential for a geographic infiltration by competitors or start-ups like yours, and can your venture survive it?
With growth, can you expand into other geographic locations?
The ability to understand your responses to these questions, in depth of course, can help you as an entrepreneur place a value on your venture. Learning and understanding these aspects can really help you to be realistic and even avoid potential pitfalls like overvaluing your venture and not being able to deliver. All in all, it will help you to be prepared for angel investors so that you can be on the same page about the value of your startup.
Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.
(2010). Retrieved from Angel Investor Report: http://www.angelinvestorreport.com/start-up-valuation.php