Factors to Consider While Valuing Startups

In the early phases of a startup, a financial technique known as startup valuation is utilized to estimate its worth. An entrepreneur can use this method to determine the best way to obtain capital for their firm and to aid in the development of short- and long-term strategies for the company. A startup valuation does not, however, take into account all of the possible valuation aspects that may have an impact on the company’s future.

But, the crucial valuation factors will always be the market size for the product or revenue valuation by stage. You probably need to consider all these questions and maybe even more. We at Eqvista might have some valuable outputs; check out the rest of the article to know more.

What’s your market size?

Be it any product or service — the product/service idea might go down the drain if it’s not a growing market. The bigger the market, the bigger the company’s valuation, and it will look more attractive for investments.

Approaching an investor with just a good idea might not be enough. But, having efficient proof that is big enough for the people to benefit from it may pique the investors’ interests. The idea will eventually be a viable business opportunity, so you must know your market size.

Try and break down your market size into three categories:

TAM (also known as Total Addressable Market or Total Available Market) is the overall revenue of opportunity available to a service or product if 100% market share is achieved. It’s crucial to determine the level of funding and effort a company or person should invest in a brand new line of business.

SAM (also known as Serviceable Available Market or Serviceable Addressable Market) is a part of TAM that helps reach the current business model. If not for SAM, you will never be able to evaluate the TAM since SAM defines the segment that best fits the business or evaluates the “reachable market”.

SOM (also known as Serviceable Obtainable Market) helps evaluate the portion of revenue within a particular product segment that a company can attain. It estimates the market value of the specific product that a company garners. So SOM is a portion of market segmentation analysis, broadly used in a company’s operational, marketing, and investing decisions.

Let’s not forget that TAM, SAM, and SOM aren’t just random numbers or stats; those must be kept as high as possible during startup valuation. In the meantime, only the highest numbers won’t impress the investors; the idea must be very attractive to open an investment opportunity.

Tip: You can use the Google AdWords Keyword Planner tool to estimate the monthly search analysis for your product’s market on Google. Try to narrow down the results by segmenting the customers to avoid inaccuracies.

Try evaluating by stage

The valuation approach for every development stage will often attract venture capital firms and investors to develop a rough company value. The investors primarily set such values depending on the venture’s commercial development stage. It also shows the company’s future pathway, lowers risks, and increases its value.

Of course, the particular value ranges may vary depending on the investors and the company or service. But when a startup has nothing other than a business plan, the investors are more likely to have the lowest valuations. The investors will assign a higher value if the company achieves the development milestones.

If opportunity doesn’t knock, build the door.” — Milton Berle

Multiple private equity companies will utilize the valuation approach and achieve the set milestones to receive additional funding. For example, the initial financing level might be just for providing wages to the employees to develop the company’s product or service. So analyzing the stages will give the investors a clear pathway to market and mass-production.

Know your comparable

Though you have your TAM, SAM, and SON with a massive valuation, that doesn’t necessarily mean the product will be profitable. Startups that struggle with the competition analysis don’t hold off well with the investors. The competitors’ analysis helps to find your startup’s baseline value and pay attention to the competitive landscape. Be on point with your research of the exact geographic location or niche you are going into. When the comparable are valued within a specific price range, the range becomes a steady factor for the investors. If a newly launched B2C app sold for one crore, the other companies in that market will be valued similarly until the conditions change or go down.

If you have high-growth or high-tech products, try to get advice from lawyers and accountants who are familiar with the same niche as your company. Establish the relationships between business people to determine the market for comparable at your stage. There might be cases where an accountant undervalues the product while a lawyer overvalued them, so talk to both sides before concluding your decision. If you still tend to struggle with your competitor research and to finalize a relevant valuation date, consult a financial advisor.

Ask them to help you find the proper valuations in recent financings in similar niche companies. Too many competitions can harm the total valuation even if your product has a significant market value. The best way is to show investors that customers will leave the competitor when you release the product in the market. Yet, customers willing to change for a new product is rare, so your product has to be ten times better for customers to switch.

Ask the following four questions to assess your competition,

How recognizable is the competitor in the market?

What’s their marketing strategy?

How much funding do they receive?

How does the market receive their product?

The Team

Founders of tech companies often make the mistake of focusing solely on their technical abilities and overlooking the other side of the coin that is just as important as the team.

Your startup will face a variety of difficulties from the outset, including issues with your product or market, business model failures, rising competition, or a lack of funding. How do you do it? It’s difficult and demands several time and personality traits for the founders to handle it. But then, with a successful team comes successful progress.

The six essential characteristics of a high-value team:

• Commercial intelligence as well as technical know-how
• The ability to work out differences in a peaceful manner.
• Being able to tell when to give up and when to keep going.
• Assumptions and dynamics of the market as well as metrics
• Knowledge sharing and collaboration are essential for a successful business.
• Equity distribution among founders.

These are the other startup valuation factors to consider — Customer Base, Brand Value, Profit and Revenue, Market and competitors, Business model, capital invested, and Traction.

Conclusion

These are some crucial reasons why determining the startup valuation is essential. So be spot-on with your niche, experience, product expertise, and other possibilities for getting investments to scale your company gradually. Why is determining the startup valuation important? There are multiple reasons; one essential point is, “highest valuation is not always a good thing” and it might come with aggressive or impossible demands. Hopefully, the factors mentioned above — market size, evaluation by stage, comparables, and Team can help you have more leverage while pitching to investors. But do you want to be on top of your game? Contact us on Eqvista for more guidance on factors to consider while valuing startups.