Fundraising · Investors

How can you valuate a company in an early stage?

Luis Peralta Founder & CTO

April 29th, 2020

If I have a company that is currently making a little money and I want to raise capital to invest in marketing and sales, how can I do a valuation to know how much percentage of the company I will need to give and how much I should ask for that percentage. In an early stage where is not a lot of capital, what are the key factors that have an implication in the current and future value of the company for investors?

Charles More 9-5 I invest in transport solutions,5+ I'm outside

April 30th, 2020

A company is fundamentally valued on it's risk vs rewards characteristics. As the risk of success increases, the reward must commensurately increase (ie price must lower). With no metrics in a pre-revenue (or little revenue) business this technique can be much more subjective.


Generally the market will invest in pre-revenue businesses at a price equivalent to between 1x - 2x the expected revenue from year 1 of operations (after investment) - in a start-up that is seen be a price that follows the risk/reward payoff theory. So that is a good place to start, then work backwards from there by discounting for other factors that would be seen as risky from an investors point of view. Ie, limited experience, unproven technology, cost overruns potential. As long as you have confidence in your proposal to investors you could reasonably set a price equivalent to 2x revenue. The type of investor you are pitching to will determine how likely they are to agree with you. ie friends and family will agree blindly, local high net worth individuals will challenge a bit, and seed investors will discount heavily if you have limited experience.


My view is to set a price equal at 1x revenue and then just say to investors this is the market price investors are currently investing in and then don't talk about price again. Investors on the other hand generally don't have a clue what would be a better valuation. They are looking at the reward opportunities and are making a judgement on whether you can deliver or not. It would help if you knew of any similar businesses have received investment or any start-up in general in the area and be able to say their investment valuation somewhat agrees - ie that is what the market is paying for this (type of) reward potential. Also knowledge of what revenue in the first year of operations of your venture will be definitely helps.


As you receive investment and deliver accordingly you can increase your valuation and ask for more capital. You can then ask for capital at a valuation of 5x - 10x your expected revenue. This link shows current market valuations for SaaS businesses. https://medium.com/point-nine-news/the-saas-funding-napkin-2018-ea1b168a5b78.


Happy to explain further if necessary.


Regards,

Charles

John Mark Muwangala Cofounder

April 29th, 2020

Hi Luis, if you don't have any signed contracts yet, any amount that can help you get and sustain a few contracts is all you need. Don't try to value now is you can.

Virendra Kaithwas Getting Started

April 30th, 2020

I suggest you to read - "The Personal MBA by Josh Kaufman" , it'll help you alot .

Dinusha Kornkaduwa COO - EXPRESS 418 (PRIVATE) LIMITED

April 30th, 2020

Hi Luis, You can use the following models to value the company. 1. Discounted cash flow method 2. Revenue multiple methods 3. Revenue equivalent method 4. Edward Milham Method Thanks & stay safe, DK -- *Dinusha Kornkaduwa* Chief Operating Officer, Express 418 (Private) Limited, Level 26, East Tower, World Trade Centre, Colombo 00100, Sri Lanka. T +94 115 116 117 | F +94 117 551 551 | M +94 772 353 915 dinusha.kornkaduwa@express.lk | http://amphibious.express.lk/