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How to accurately value your startup for your next round of financing



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Value and decide how much equity to give away from a company that has undoubtedly put their heart and soul is always going to be a gnarly problem. Unfortunately there is no single answer, but here are some tips that can help you navigate this notoriously complicated territory.

In general, when it comes to valuing your company for a round of financing, the founders will ask one of three questions:

  • How much money should I raise?
  • What percentage of the company should you give away?
  • What valuation of the company should I use?

In almost all cases, the answer is & # 39; depends, which, let's face it, is as useful as a chocolate teapot. With this in mind, it's a good idea to establish what it depends on.

The three questions are intertwined, a decision about one part impacts the others, so it's best to start from the beginning, which is:

  • Decide how much money you want to raise and move on; or
  • Start with the amount of your company you want to give away, and work back

Option 1
: Decide how much money you want to raise

Some advisors will tell you "increase as much as you can", while venture capitalists Investors will generally say "you should plan to raise enough to last 12 to 18 months before you need to raise money again."

However, uploading is incredibly difficult, so it is vital that you understand how much you need to hit your KPI, what would be useful in terms of buffering, and what is realistic about the results and management of the expectations of the investors

The reason for a 12-18 month track is that it will have to be on the fundraising route Six months before it will have new money in the bank and it will have to show growth from time to time so that new investors will interest in.

Any track less than 12 months and it will be difficult to reach key milestones or show significant traction, which means you can not justify your next round of valuation. It's called a track for a reason: if you do not have a lift before you reach the end, things will stop suddenly.

So, if your starting point is to calculate the cash you need, then look at your monthly consumption rate: add the members of the team you plan to hire, marketing expenses, development costs, etc. and rerun the numbers. Now multiply that combustion speed by the number of months you need for your track. Remember to include a buffer for the unknown since anything can happen and usually it does in the home territory.

At this point it is important to remember that although you have used the above as a calculation, the financing of your monthly burn is not the message your investors want to hear. Then, when asked why you are raising £ x, remember to correlate your response to milestones and not to survival, the resources you will need to achieve them and the time it will take to get there.

Option 2: How much of your company do you want to give away?

A is the same as Dragons & # 39; Den for big television, here in the real world, high-growth investment does not happen like that.

The general rule for angels / seed stage rounds is that the founders should aim to give somewhere between 10 and 20 percent of the company's capital. These parameters were not extracted from scratch, they are based on what we see the first capital investors looking for in terms of performance.

You see, it's all about the investor. They are making bets about you being amazing with the clear knowledge that most of you will not be, which will not generate any benefit for them. They are exposed to a high risk / high potential scenario, therefore, it is likely to demand a substantial percentage of their initial capital, which, if you think about it, seems fair.

So, start thinking about calculating your valuation based on the amount you want to raise and the equity you want to give.

But, although this principle has existed for more than a decade, the data reveal a new trend in the United Kingdom, so it must verify its own market: the increase in the Salami Round:

Instead of raising a single large amount once it would take 12 to 18 months, a growing number of companies are opting for a series of small rises giving away somewhere in the region from two to six percent of capital per increase in shorter periods of time.

In the past, this type of increase pattern would have been inadvisable for some reasons:

  • When there is no rest to raise the product and sales may suffer
  • Too complex the bound tables may result in errors that lead to problems later
  • The cut-off time and the cost of doing all the legals for funding rounds of short cycle financing are prohibitive

Of course, giving away too much equity also a big concern However, Technological innovation can and has changed all this.

Now there are new solutions that facilitate the management of tapas boards and the modeling of exit scenarios. As for the time commitment of closing a round or an extension of an existing round, that now depends on how quickly you can click on a button, not on how quickly you can find a lawyer.

Valuation of the company

If you start from the amount you want to raise or the percentage of capital you want to give away, all the roads will eventually lead you to the valuation. The only purpose of this number is to add yourself to a formula so that you can calculate the percentage of participation you wish to assign or, alternatively, the percentage of participation that your investor is requesting.

So, how should you value your company to get a number that equals its real value, instead of one derived from its combustion rate?

If I had to ask different VCs, they would come up with a nice variety of answers, including:

  • We take the amount you want to raise and do the math from there
  • Send us a number – if you have enough weight And you can justify that assessment based on the vision of your product, and you and your team's ability to deliver it, we're fine!
  • The biggest determinant of the value of your startup are the market forces of the industry and the sector in which you play, which include the balance (or imbalance) between demand and supply of money, the current situation and the size of the outputs recent, the willingness of an investor to pay a premium to reach an agreement, and the level of desperation of the employer in search of money
  • Go to Crunchbase, find your nearest competitor, reflect your raise story and take your val uation up or down depending on whether you are pre or post entry, pre or post release.
  • Multiple round size from 4X to 5X

Some VCs are directed by your head, others by the heart. Either way, there is no substitute for a data-driven decision, and thanks to the available data that shows what really happens in a variety of round fund sizes, you are now in a good position to not only find a number, but justify it [19659017] UK Business Rating Indicator

The analysis of UK business data reveals different funding patterns that highlight the step-wise rating bands. This may not exactly represent your home environment if you are outside the UK, but at least this will give you an idea of ​​what is happening in Europe and outside the US. USA:

Stage: Idea, valuation: £ 300K – £ 500K – You are looking to raise £ 50K to £ 100K to get your idea moving forward. New innovation means that the legals can be classified for just £ 750, just add investors and that's it.

Stage: Prototype, evaluation: £ 300K- £ 750K – You have spent six months refining the idea, performing user tests and creating a functional prototype. You are somewhere between Idea and Launch, with a rating that matches.

Stage: Launch, assessment: £ 500K- £ 1M – You have spent a year building the product with your co-founders, probably without paying a salary, in addition to having invested £ 50K of your own money / time in the project. It is close to its launch, now wants to raise money for the last mile of product development and marketing.

Stage: traction, valuation: £ 1M- £ 2M – You have launched (congratulations!) And you are seeing good signs of early traction, enough to excite investors. You have income plans, but nothing to show yet.

Stage: Income, valuation: £ 1M- £ 3M – Unlike Silicon Valley, where the vision of being a unicorn is often enough to interest investors, the Investors in the United Kingdom (and probably others outside the US) like the income or, at least, the promise of imminent income. Conservative or sensitive? Probably both, but in any case if it does not show income, getting funds in the UK beyond the prototype stage will be difficult. However, once you have the income, along with a plan to climb, you will be on a good streak.

Stage: Scale, valuation: £ 3M + – To get to this point, you need to have discovered the product / market fit, repeatable business test and great demand of the market demonstrable by data , a clear path to scale and new business acquisition, and has identified the customer acquisition cost and the customer's life value. You will know when you get there. But keep in mind that with that valuation (and amount collected) you will have moved firmly from angel investor to venture capital territory that comes with a lot of information and investor obligations, complex fundraising terms, government and expectations. Something to keep in mind before jumping to the top table too soon.

Caution note – Silicon Valley figures will often be much higher, so do not be tempted to use them in any market outside the US. UU., Or investors will think you've been drinking too much Silicon Valley Kool-Aid.

Ultimately, the investor will have the last word, but the future is bright for the start-up market, driven by technological innovation, which simplifies the financing and administration process from the start. The hope is that by eliminating much of the uncertainty that currently surrounds administration costs, more companies can focus on the ultimate goal; making a starting idea a successful reality.

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