How does business valuation help startup to raise funds from investors?
Every startup firm needs to have finance to kick start their dream business project to reality. Finance is the lifeblood of every startup business. It is with the help of funds, the startup owners can give wings to their dream and chalk out blue prints to carry out their startup venture.
However, when it comes to startups, it becomes difficult for them to raise funds for their new venture. Many financial organizations are skeptical in providing funds to startups. However, with the help of good business valuation a startup venture can raise good and required amount of funds to carry out their business venture easily.
So what is this business valuation means? Business valuation of startup firms is the process and set of procedures used to estimate the economic value of an owner’s interest in a business. It is the analysis or review of entire business as a whole. It is conducted to determine the overall standing and operation of the business before granting the funds to the startup owner.
Startup valuation is the process of quantifying the worth of the company. During seed funding, the investors pour the funds in startup in exchange for part of equity in the company. Valuation matters for every startup as it helps in deciding the amount of equity an entrepreneur has to give an investor in exchange of requisite funds. This means if the company has higher valuation, it has to give lesser amount of equity as shares to an investor in exchange of seed investment.
Some important key takeaways for business valuation for startups are:;
- If a startup venture is trying to raise capital for its venture, or is thinking of putting money into one, it is important to determine the worth of the company.
- 2. Startup companies often look to angel or investors to raise the much needed capital to get their business off the ground
- 3. Valuing the business of startups accurately is tough as they do not have operating income or perhaps even salable product yet, and will be spending money to get things in line.
- 4. Approaches like discounted cash flows, cost to duplicate and stage valuation can be used to value the business of startups.
Valuing business of startup is not a cake walk affair. There are many aspects that have to be considered, right from the team of management, trends of market to the demand for the products and risk of marketing involved.
Some of the most common startup business valuation methods are:
· Venture capital method
· Cost to duplicate methods
· Discounted cash flow method
· Book value method etc
Things to consider when choosing the valuation method are:
Knowledge of the business in an industry and geographical location and what they are valued are the key parameters in figuring out the value of startup in same industry and location and thus most of the startup valuation methods include these aspects.
No single method is useful all the time and thus a startup owner should use multiple methods for business valuation. Such multiple methods help the startup business determine
an average valuation. This average valuation is important as none of the startup valuation methods are mathematically and scientifically accurate as all are based on guesswork and predictions.
Startup firm with higher business valuation, makes it gives a lesser amount of equity or shares to an investor in exchange of seed investment. Not only for entrepreneurs, but evaluation for startups is vital from investors’ point of view as it helps them gauge amount of return they will receive on their invested amount.