Company Valuation of Early Stage Startups
Have you ever wondered, what is the right amount of money you need to raise at a particular stage of your startup? How can you measure your company value? And what could be the possible implications of overvalued companies?
Working on a startup can be a challenging experience on its own. This is why figuring out how much your business is worth is crucial when you are looking for investors to scale up your business.
For this cause, Ylemer arranged an event on the 4th of July, to bring potential entrepreneurs, mentors and angel investors to join its ‘Inspire, We Inspire’ online roundtable. The purpose of the event is to bring participants from all over the world in the quest to share, inspire and learn through an open discussion.
Stefano Passarello, a serial entrepreneur and an innovation mentor, was invited as a keynote speaker to share his insights on ‘Company Valuation of Early Stage Startups’. Having been invested in more than 10 startups, Stefano’s experience in investing in entrepreneurial ventures has allowed him to identify how to put the right price tag for startups, and the underlying forces that can attract potential angel investors.
Here, we recapped some of the highlights from Ylemer’s online roundtable:
What it Really Means by Startup Valuation?
Stefano mentioned that company valuation for startups is more an art than a scientific effort to determine how much an investor is going to earn out of your company’s share.
He believes that any company in its initial phases may have its value as close to a zero. But it does not mean that there is no potential of making money in the future. Valuating your company simply means finding out how much percentage are you willing to share with your investor in return for a seed investment.
What is Your Deal to Seal?
The real deal at this point is to figure out how you can use your company’s initial valuation and convert it into figures, and how can you claim your calculation without technically having a track record.
Stefano suggests using similar industry examples to build upon your startup. Once you have successfully validated your idea and positioning, gather just enough money to take you through to the next stage. During this process, don’t underestimate the value that you have to offer. Your idea can end up being even better than what you’d thought initially.
Traction speaks louder than words. Once your business starts to grow organically, more investors will begin to pitch in automatically.
Key to Successful Valuation
Stefano shed light on how a startup undergoes certain stages of valuation. He mentioned that traction is one of the most important aspects of any business idea. Traction refers to having a considerable amount of customers who are willing to spend money on your product. This is considered to be the sweet spot between an entrepreneur and an investor.
Besides other elements, the second most emphasized factor, according to Stefano, has to be, right timing. He mentioned, how in his experience he has seen many great ideas come forward but only to arrive at a time may be too soon or too late.
He couldn’t have stressed the importance of correct timing more than when he mentioned that a startup could only be successful if it has an ‘Idea, Execution and Correct Timing’. When asked about how he would rate the three of these factors, he gave “the idea” a bronze medal, “execution” a silver, and “time” a gold medal.
So, if you have got an idea that could potentially become a successful startup, don’t just keep it to yourself, pitch and share it to the right people, at the right place on the right time.
Is Valuation A Myth? Or Does It Really Matter?
Stefano used a fascinating example to explain this point. He mentioned two valuation cases that are now nowhere close to how much investors initially valued them at that time. Who were those two startups? Any guesses?
It’s Dropbox VS Instagram. When both Dropbox and Instagram started as a one-man show, things were quite different. Kevin Systrom with his idea for Burbn (predecessor of Instagram) went to Baseline Ventures and received $500K in exchange for about 20% of revenue share.
Similarly, Drew Houston from Dropbox went to Y-Combinator, where he was able to receive $20K in exchange for 5% of Dropbox. If we look at their valuation today, both companies either were or are valued above $1Billion.
Could you have thought of a similar valuation at the time when these founders were looking for funds from venture capitalists?
That is why early-stage valuations, even though as essential they are to attract investors, cannot depict or underestimate the growth of your business idea.
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Sadia Mehfooz Khan
Chief Copywriter | Ylemer