Today we’re going to be talking about how to value a startup without revenue. Figuring out the valuation of a company is an art. They’re going to be expecting you to have that on the investor’s side, on the potential acquirer’s side, but startups, especially when they’re born, have no revenue. In today’s video, we’re going to be walking you through the different methods of valuing a startup and to understand what that price tag could be on your business so that you’re able to make deals the right way and in your own way.
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For the investors, essentially, they would be investing money and receiving in exchange equity ownership in your business. Another thing or another area of why the valuation is so important is because it gives you credibility.
The traditional way of valuing startups is the EBITDA. It’s the earnings before interest, tax, depreciation, and amortization.
Here’s the thing: you never want to talk first because if you talk first, you’re going to lose.
The first method to value a company is the Berkus Method. This method is going to be focusing on the following factors.
-The business idea
-Having a prototype
-Strength of the management team
-Having rolled out a product or starting sales.
The next is going to be the Scorecard Method. What this method does is compare against other companies that may be at your same stage or maybe in your same location or in your same segment and will be relying on the following factors to put a value to the business.
-The strength of management
-The size of the opportunity
-The product or the technology
-The competitive environment
-Marketing and sales
-Need for additional capital
The next one is going to be the Venture Capital Method. What the Venture Capital Method does is focus into the future, the possibility, the potential.
The next is the Chicago Method. The Chicago Method focuses on the cashflow. It’s going to have the best case, the worst case, and the base case scenario depending on what’s going to be the outcome and the potential scenarios. But again, all around cashflow.
Then, you’re going to have the Risk Summation Factor as a way to value. Here, what it’s going to look at is different factors, and depending on where you’re at, it’s going to extract value from the actual number that it is coming up with as a result of this exercise. Some of these factors are the following.
-A potential exit
-Sales and marketing
-Stage of the business
There are actually different ways that you can use to increase the valuation of your company much quicker, especially when you’re in the process or in the middle of getting that deal done. So, those are the following: presenting much better. One of the things that I see all the time is that when you’re doing the presentation, you really need to nail it on storytelling because many of those investors are investing in the future in the possibility of your business.
You need to start selling. If you really believe that the revenue is something that is pulling you down on the valuation side, you need to get out there; you need to close customers, large accounts, whatever that is to continue to move the needle forward. Because that traction, that progress around the sales and around the revenue is going to help that investor or that acquirer to understand that you are heading in the right direction, and maybe there are different multiples that they can use around your valuation.
Get your MVP or product right away because when you have that product out, when you’re getting feedback when you’re getting data points from the market where you can showcase that progress that people are really into your product or service that it’s flying off the shelves. You can use that as a way to tell the investor that what’s coming is really big, and it’s going to create that excitement and that fear of missing out because they’re going to believe that if they don’t jump in, then their ticket is going to be much, much more expensive down the line.
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