Startup Valuations

by Adam on November 22, 2013

In the lifecycle of a startup company, raising money and finding investment to fuel growth can be one of the biggest stumbling blocks of an entrepreneur’s career. With that, the issue of startup valuation goes hand-in-hand with questions about how much to raise, and from whom. Initial valuations of companies can have an effect on so many other aspects of a startup, not least of which about how much it’s worth and how much equity a founder has to give away. So, it’s useful to think early on (especially when the startup is pre-revenue) about what valuation drivers are going to have the greatest impact on investor perspectives of future growth potential.

There are several different aspects to consider with valuation drivers, and the below is meant to be an example list, but by no means inclusive of all of those aspects:

User Metrics

  • Unique Visitors / Month – This is likely one of the most often referenced metrics for any startup looking to raise money, as investors will want to know how broad an audience you’ll engage. Keep in mind how you will monetize those visits, whether through advertising, premium memberships or other services.
  • Registered Users – If your website/company will offer a members-only login area, projecting registered users can be a good indication of how well you think you’ll convert unique visitors into returning customers. Again, try to project the value of registered users over unique visitors (they should likely have a higher value, especially if you have products/services to sell and because you have a dedicated contact for those users).

In both cases, also be sure to build in realistic assessments of both projected cost user/member acquisition (CPA) and the lifetime value of each user (LTV) through whatever means you will monetize those visits.

 

Transaction Metrics

  • Product Sales – Whatever the product, if you are selling something, the projected sales potential of the product will be one of the biggest drivers of early-stage valuation. This is dependent on providing a realistic assessment of that potential, and will work hand-in-hand with the projections around user traffic, so be sure that sales and traffic correlate to each other in rational ways (by that I mean, if your traffic is going up from month to month, sales should also increase incrementally).
  • Client Base – If you are a services or B2B company, new clients mean new business and that equals revenue. As a B2B provider, pay particular attention to how your client base grows, as that will convince investors of the earnings potential. Also, be sure to break out the growth of new clients vs returning clients, as both will be important to long-term success.
  • Fees – Affiliate fees, service fees, transaction fees, oh my! In a world where every penny counts, don’t overlook the value of tracking your fee structure and using your financial documents to exemplify how a fee-based business will grow over time. Oftentimes, this metric shouldn’t be taken in a vacuum, as it relates to client base, or number of users or sales, but be sure to call it out as a driver of revenue.

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