Factors That Affect Startup Valuation Before Funding

August 27, 2019

5 min read

Read our guide on the factors that affect startup valuation for a startup company in India before funding.

shivi

Shivi Gupta

Consultant, Gurgaon

TIPS BUSINESS
Factors That Affect Startup Valuation Before Funding

 

Everything has a price tag -  even a startup! Every startup has a value and unlike other things, the higher the price, the more money the startup can raise in its next round of funding. Startup valuation is not a new term - on the basis of a startup’s valuation, it is able to attract more investors to put their money in the business. However, when it comes to preparing a startup for business valuation, it leaves many startup founders and entrepreneurs dumbstruck.

Majority of the first-time entrepreneurs are unaware of what goes into preparing a startup for business valuation and what they should do before presenting it to investors. Many call startup valuation an art and something that requires in-depth knowledge and intricate planning before the investors are brought into the picture. The law has also made it necessary to prepare a Valuation Report before raising funds in different funding rounds, be it angel funding, venture capital Series A, B, or C funding.

SeekWiser’s financial experts have prepared a comprehensive guide to the things that must be considered while estimating the startup valuation for a startup company in India.

Know Your Industry

One of the most important factors that affect a startup’s valuation is the industry in which the startup operates. One industry may have a different valuation methodology that the other industries. For instance, an EduTech business that amalgamates AI and machine learning processes will have more startup valuation than a traditional book-selling business. 

Investors are always looking to invest in a startup that goes beyond the limits pre-defined by its industry and incorporates new ideas and innovation in presenting its goods or services in the market.

The Demand-Supply Tussle

The old economic principle of demand and supply also applies to startup valuation. Investors will be interested in a business which deals with goods or services which have more demand than its supply in the market. There must be ‘real/actual’ demand i.e. people are already demanding the goods or services, or ‘perceived demand’ i.e. people will have the demand for the goods or services in the near future.

Less competition i.e. less supply of the goods or services in the market will also drive up the value of a startup as investors will see a less potential risk in the business model when there will be no or fewer competitors supplying the same goods or services in the market. Financial consultants can guide the entrepreneur in evaluating the demand and supply in the market for their product or service before they prepare to present their business to potential investors.

Your Startup Stage Matters

The stage at which a business is, also acts as a key factor in determining the valuation of the startup. It is important to wait until the right moment and then hit the chord rather than rushing into approaching the investors during the early stages of the startup.

With each stage of a startup, the valuation of the business also goes up; a bootstrapped business will rank lower on the startup valuation graph as compared to a business which has raised its Series A round of funding.

ALSO READ: Stages Of Startup Funding

Choosing The Right Startup Valuation Method

‘One glove does not fit all’ and startups are no exceptions to this saying. It is important to choose the right startup valuation method to get the most accurate value of the business. A wrong startup valuation method may not take into consideration the valuation factors of the particular industry the startup belongs to.

There are various startup valuation methods which can be used to determine the value of a business:

  1. Discounted Cash Flow Method

  2. Comparison Valuation Method

  3. Venture Capital Method

  4. Asset-Based Valuation Method

  5. Market-Based Valuation Method

  6. Scorecard Valuation Method

Startups can consult experienced financial consultants in India to know the best startup valuation method to choose while determining the value of the startup.

Business Strategy

Investors are attracted to businesses which have a well-laid strategy for both long term and short term. A well-prepared business strategy is a positive sign and investors perceive it as a sign of less risk in the business. When the startup founders and the supporting team know what the business operations are and have defined goals, the business valuation goes up, as compared to a business with no plan or strategy.

In conclusion, investors can easily map the startup valuation and have a good sense of how much the business is worth. Knowing the factors that affect a startup’s value and working on improving them can help the entrepreneur in raising a higher value of funds from investors

SeekWiser can connect startups with the best financial consultants or startup valuation consultants who can guide the entrepreneurs in getting ready for startup valuation and rectify any mistakes or omissions before they present the business to investors. Call SeekWiser's startup valuation consultants at +91-7827886239 or send us an email at support@seekwiser.com