In the business world, valuation is a standard practice. The process can be much more complicated for a startup than it is for an established company, however, as most new businesses don’t yet have the operating and revenue history that older organizations have demonstrated.
For this reason, standard techniques typically used to evaluate growth and cash flow are not as helpful for startups. On the other hand, there are some techniques that can be useful for valuating startup companies with a comparable degree of accuracy.
If your startup is an Internet or e-commerce company, the most important first step will be placing a value on the business to attract investment capital. Determining the company’s current worth requires considering several factors. These include, but are not limited to the following:
- Number/quality of employees
- Experience and depth of management
- Revenues and expenses
- Customer relationships
- Number of years in business
- Technology and patents
- Current and forecasted economic conditions
These criteria may be used to identify the company’s stage of growth, which plays a significant role in the valuation process. There are four main growth cycle stages: initial/seed stage, early stage, middle stage and late stage.
The key difference between seed stage and early stage companies is the state of business progress. While seed-stage companies might only have an idea for a product or service, an early-stage company typically has a corporate organization in place, has developed a website and likely started beta testing. A middle-stage company has a fully developed product or service, an established business model and potential revenue growth. At this stage, strategic partnerships have also been created and there may already be repeat customers.
Lastly, a late-stage company has proven its business model and management’s effectiveness, has formed long-lasting strategic partnerships and is experiencing solid revenue growth.
Your company’s startup stage may be used to establish a range of values — anywhere from $0 to more than $35 million — to help compare it to other similar-stage companies. These values are based on factors like market competition and the likelihood of success, and will allow potential investors to more easily compare investment opportunities between companies. However, investors will also be likely to evaluate a company’s specific circumstances, which may significantly alter the previously estimated value.
Business valuation for startups can be a difficult issue to address, but a skilled attorney can help you through the process.
BoltNagi is a well-established and widely respected business law firm serving clients throughout the U.S. Virgin Islands.