How Does Start-Up Valuation Work At The Seed Stage?
How do I carry out the process of my start-up valuation?
This a question every start-up founder asks themselves when they start their business.
Well, we need to start from the beginning, when an entrepreneur starts a business, it is usually seen as a risky decision. The availability of skilled workers and equipment does not just determine a company’s success alone, financial stability is also required to see the plan through.
So, it’s a well-known fact that raising funds is an inevitable part of any start-up’s journey. And for establishing a successful business, start-up’s need to go through three different rounds of raising funds, which are pre-seed, seed, and series round. The seed stage is the timing of raising funds and the actual amount that one wants to raise holds the key.
Timing is everything, because if you are late then it creates competition and if you are early at the risk of not being relevant in the market. So, by the time it reaches seeding stage the product needs to be ready.
The main issue starts when the start-up is not able to pool in funds from the raised funds and they have to resort to an outside pool of money. In order to approach the seeding amount, they have to seek seed funding and that’s where valuation comes in the picture. Let’s discuss it more in detail.
What Exactly is Start-Up Valuation & Why Does It Matter?
What is start-up valuation? You must have this question in your mind. In simpler terms, it’s the process of checking the value of a company. During the seed funding round, an investor provides funding in exchange of equity in the company. That is why valuation is important for entrepreneurs and it helps them know how much shares can be given to an investor in exchange for ownership rights. It also helps investors, as they need to know how much percentage ownership they will get in the start-up. So, start-up valuation is kind of dealmaker or it can turn out to be dealbreaker.
The founders need to have all the proper knowledge how the entire process of start-up valuation works. Quoting a high amount when there is no revenue generation and where expectations are very high and if a start-up is not able to meet the expectations, the process can get rejected. It might lead to low valuation of the start-up, which can affect the company negatively. It might also lead to very long process as founders will have a hard time convincing the investor. And the opposite is true, as a low valuation can lead to giving out large chunk of equity to an investor.
Factors Which Influence the Valuation of Company
- Traction is one of the major factors that impact the valuation of the seed stage. The customer demand is a proof which is a must needed to check the valuation. It’s the most important factor to convince the investor to invest their money.
- Reputation is also involved with the valuation process. Founders need to ensure a positive image in the market of the start-up. It’s an important factor as they need to check the founder capabilities and their image in the market.
- Prototypes are a major factor that can influence the decision of an investor. So, before planning a pitch a prototype should be ready.
- Pre-valuation revenues can help in convincing an investor, since a product which is in the market has generated a revenue can be of help to an investor to know how the company is performing in the market.
- Distribution channels can be helpful in start-up valuation as well, this is because the product/service will be in a preliminary stage.
- Industry/Sector plays an important part in start-up valuation, like if the start-up is in some booming industry the investor might pay huge amounts to the founders for a stake in the start-up.
The start-up valuation is an important factor as it helps both the founders as well as the investors in determining the value of the company. The founder needs to keep their expectations realistic and be flexible. They should also negotiate with the investors. These are the ways a company can check their valuation.