investment, finance, valuationAssume a startup is already generating revenue (and profit), forecast generating $ X in the coming 12 months, and has Y month to month grow rate.
What is a fair valuation of this startup, if we are going to convince a VC? Are there any figures missing?
The sorry reality is there isn’t a right or wrong formula, let alone a magical one that lets you sprinkle pixie dust on a business’ financials and derive a correct valuation.
Entire books were written on business valuation, most of them with their pet method. When you’re an early stage company, you also need to factor in the team, the potential market and its type, the plan, traction, and what have you. You’ll find plenty of proxies in other valuation questions – some dubious IMO, some less so.
Bluntly, the only correct figure in practice is the one your buyer is willing to ink on a check and that you’re comfortable accepting. I realize it’s not the very helpful answer you’re hoping for, but it’s the sorry reality: shop around and see who offers the best combination of check size, rolodex size, and amount of help you’ll get (advice, mentorship).
When negotiations steer to valuation, be sure to have a solid BATNA. And in case you’re not used to negotiating deals, be sure to do so as a whole rather than by raising points one by one. (You’ll get chewed up for breakfast if you try the latter.)
There is no clear cut answer to this question but you could make a valuation using these numbers only. Maybe you could factor in the potential market market size. See this answer.
The thing you need to keep in mind is that valuating a business is something arbitrary especially in the early days. There are many cases where startups raise huge seed rounds without even having a proper demo. You could argue that they worth X based on the sum they raised and the % they gave up for this, but you'd most likely be wrong cause they worth noting since they didn't built anything yet. But they need money and they need to give equity away. Hence the wrong notion of value in the early days.
You cold argue the same for later rounds of funding. Let's say you need X million to expand your business but you still haven't figured out how you'll make money. Your value would be determined again based on the investment size and equity given. But that still wouldn't be your real value!
What I'm trying to say is that if you can justify the size of the investment, and the size of the equity some other way than your revenue and growth rate you could have a successful funding round.
Even with minimal risk a typical investor is going to want a 15% return.
Start with simple present value calculation. Start with your income projections for the next 6 years based on current growth and a return of 15% and get a present value. A lot of other stuff is going to go into it but that is a starting number to look at. If you can show a good chance of exceeding current growth then you might do better than that number.
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