Startup valuation calculator – The light in a dark room

startup valuations | bizval Business Valuations

A startup valuation calculator? Imagine standing on one side of a pitch-dark room. You know that there’s a bed and a cupboard between you and the door on the other side, along with a whole bunch of undisclosed obstacles. On the other side of this mystical room that nobody really understands or can explain properly, your dream partner is planning to also try and find you.

You both set off on a journey of discovery, which is a nice way of saying that you bump your way across the room in the hope of finding each other. There’s no obvious plan and no way of explaining a better way to do it. At some point, someone will stand on a cat and get clawed for the pleasure. Worst of all, once you find each other, there’s no agreement on who gets which side of the bed.

Welcome to startup capital raises. Or at least, startup capital raises without the benefit of a bizval valuation. The good news is that you don’t have to fumble in the darkness anymore.

Startup valuation calculator How do you value a startup?

Perhaps the right question is: what is the value of an idea?

If this was an easy question to answer, then we wouldn’t have a business and we certainly wouldn’t have a variety of delighted clients who can provide a referral. Startups are notoriously difficult to value because most of the value is unproven; captured on a whiteboard rather than in a bank account.

There are no historical earnings; there are only forecasts. Instead of a multi-year track record, there are letters of intent from potential clients and beautiful PowerPoint slides designed to impress investors.

Heck, if you’re really lucky, there’s a proper strategic financial model of some description. In most cases, there’s a vague idea of pricing and what the thing will cost to build.

And in case you’re wondering, it’s no different from one country to the next. Based on recent client engagements in Germany, the UK and the US, we can confirm that the world of startups is split into two regions: (1) Silicon Valley and (2) everywhere else.

We are working on our understanding of the first region, although we aren’t sure that anyone will ever be able to put any financial sense to some of the stuff that goes on there. Thankfully, we are feeling confident about our understanding of everywhere else.

Cool story, but this still hasn’t answered the question!

No, it hasn’t, but the context was important. You see, the trick lies in the absolute lack of detailed information available for a startup. This is why valuation negotiations around startups are usually dark walks through cluttered rooms, with all the trappings (and excitement) they can bring.

Our goal is to build out the roadmap that empowers founders and capital providers to have high quality discussions about what a startup is worth. Each capital provider will have a different risk tolerance and level of belief in the founder, so we focus on a “what do you need to believe?” approach to valuations rather than a “here’s what we would pay” final answer. One is a tool for negotiation and dealmaking and the other is simply our opinion. We are definitely humble enough to know that the former is more valuable.

To build the roadmap, we engage deeply with the founders and ask the questions that Series C and later investors would ask. This includes all the uncomfortable ones about whether this idea will ever make a profit. In case you haven’t noticed the macroeconomic trends of the past few years, investors care about profits these days. It’s not just about a startup valuation calculator – Diving deeper is essential.

More specifically, we unpack the different market verticals and the strategy for each one. We consider the unit economics of each product or service, including a proper look at the cost of acquiring a customer. We consider what could go wrong in terms of heightened competition once other parties catch wind of this great idea. We also look at overheads and how profitability improves as the company scales. Included in this analysis is an assessment of the likelihood of further capital raises along the way and what this means for dilution.

Are we too conservative? Based on the startup engagements we’ve had to date, we would call it a dose of realism rather than conservatism. As startup founders ourselves, we know that optimists change the world and pessimists write about macroeconomics. Both groups could learn something from each other. By taking a realistic view on what the business could achieve, we believe that our approach helps founders prepare for negotiations with more sophisticated financial investors.

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But what if this really is the next big thing?

We said realism, not conservatism. Sometimes, ideas really can make it big! We take this into account with our blue-sky case that allows the founder to really dream big and show what the future could look like. Of course, this isn’t a license to come up with ridiculous forecasts. Instead, it’s a bullish case that shows what might be achieved if things go well.

In our final valuation, we put a weighting on the blue-sky case based on our perception of the strength of the business model and the abilities and experience of the founder. We show how the weighting impacts the final answer, as this gives the founder the tools to negotiate with potential investors on what their valuation implies about the level of belief in the business.

Startup valuation calculator Switch on the lights

If you’re tired of bumbling around in dark rooms when having capital raising conversations, we are ready to help. With our bizval startup offering, we are even able to help if your dream is still an idea on the wall and not much else. Contact us and let’s discuss that dream of yours.