As a new business, it is vital to calculate your full value before you put yourself out there in the world of investors and venture capitalists. Achieving this beforehand helps you negotiate with more certainty, and we’ll discuss some ways you can go about doing this below.
Consider More Than Formulas
It is vital to look at the tangible elements connected to your company and to calculate accordingly, however there is more to the picture. Most of us have heard the adage, ‘location, location, location’, and this is absolutely the truth.
There may be intrinsic attributes to a certain locale that will benefit one firm but perhaps not another. It depends on where your clientele is and what service you provide. Take into account all of the things that are perhaps more difficult to quantify but that add to your list of assets. The unique elements of your region can factor into your strategy in unique ways that you will need to articulate to those who wish to partner with you.
Conduct A Discounted Analysis Of Your Cash Flow
You will need to find a calculator that helps you find a figure referred to as NPV or ‘net present value’. Put simply, it is necessary to look into future revenue to assess where your startup will be, but you also need to adjust for inflation and other factors.
Arguably, this is a complex number to attain, and it will compel you to obtain an accurate assessment as to your annual income before tabulating what this is likely to be in the coming years. This exercise will help you create a complete picture as to the value of the business you are building.
Include Your Assets
The physical buildings you conduct your work in, if you own them, count toward your overall worth. These need to be appraised, and you’ll need to adjust for the balances you owe to any third-party institutions and any other liabilities.
For this step, it may be good to call in an expert who can properly evaluate the various components of your holdings, including intellectual property, such as ideas and patents.
Look At Your Comparables
Just like a real estate agent would not attempt to sell a piece of land without looking at what others have sold for, you will need to examine similar enterprises and their market capitalization. Often simply referred to as conducting your multiples, this process can confirm your final conclusion as accurate.
In this process, you will become familiar with certain ratios, such as earning, sales, and R & D investments. At its most basic, these have to do with the relative comparison between what your investor’s earnings per share would be to their individual price. Your company does have to be profitable to have a P/E or price to earnings ratio.
Use The Venture Capital Method
This particular model takes into account what investors are looking for. If they should wish to exit according to a particular time frame, for example, in five to seven years, they will want figures that give insight into what that will look like.
You’ll need to arrive at an exit price for this reason, and it will be necessary to work from the post-money valuation but also incorporate the associated monetary risks for your financial backers as well the type of return they can hope to expect. This can be done even for startups that are pre-revenue to determine where they will be once they have accomplished a certain level of growth.
Fidelman & Company exists to help startups with their presentation models, ensuring they can position themselves for the best chance at success. In addition, we provide coaching in fundraising, financial consulting, and management strategy. Contact us today to learn how we can be of assistance to you, and we look forward to working with you.