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Pre-money and post-money valuation
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Valuation methods
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Valuation tips
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Here’s what else to consider
If you are looking for angel investors to fund your startup, you need to know how to calculate your valuation. Valuation is the estimated worth of your business based on various factors, such as your market size, traction, revenue, growth potential, and competitive advantage. It is also a key factor in determining how much equity you are willing to give up in exchange for funding. But how do you calculate your valuation for angel investors, who often invest at an early stage when your startup may not have a lot of financial data or market validation? Here are some methods and tips to help you.
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- Hai H Nguyen Board Of Directors: VinCSS.net (VinGroup), VuaCua.vn, BeginGuru.com, DigiArt.Academy | USD 21M Capital Raised by my…
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- Raj S. Founder and CEO at utobo.com | An all-in-one commerce platform for selling digital stuff.
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1 Pre-money and post-money valuation
One of the first things you need to understand is the difference between pre-money and post-money valuation. Pre-money valuation is the value of your startup before you receive any investment. Post-money valuation is the value of your startup after you receive the investment. For example, if you have a pre-money valuation of $10 million and you raise $2 million from an angel investor, your post-money valuation is $12 million. The formula to calculate post-money valuation is: Post-money valuation = Pre-money valuation + Investment amount The formula to calculate pre-money valuation is: Pre-money valuation = Post-money valuation - Investment amount Knowing these formulas can help you negotiate with angel investors and determine how much equity you are giving up. For example, if you have a post-money valuation of $12 million and you raise $2 million, your pre-money valuation is $10 million. This means you are giving up 16.67% equity to the angel investor ($2 million / $12 million).
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Valuation of start-ups opens up many paths to reach the Enterprise Value. What matters most is the Factor M i.e. The Management. Apart from usual skill-set, gauge Vision & Mission helps then inter-weaving with EIC Analysis. The fundamentals of this approach with realistic and unbiased estimation of time, money and value they are likely to generate works out the 'Valuation'. Each start-up may have unique approach for itself.
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- Hai H Nguyen Board Of Directors: VinCSS.net (VinGroup), VuaCua.vn, BeginGuru.com, DigiArt.Academy | USD 21M Capital Raised by my portfolio | Welcome to work with Seed to Series B Investors
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In my experience helping 10 startups raising fund successful from Angel Investors, 2 things you need to know:1) Set Valuation based on money you need.If you need 100k usd, set pre-value 1 mil usd.Angel round should dilude around 10%.2) Make your vision big enoughAngel Investors mostly based on the conviction to startup founders.You should show them your big vision. And they will accept your valuation on 1)
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- Raj S. Founder and CEO at utobo.com | An all-in-one commerce platform for selling digital stuff.
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As someone who has successfully raised funds for startups in three different countries, I understand the intricacies of valuation a little bit. It's about recognizing your company's potential and effectively conveying that potential to investors.When valuing your startup, consider these approaches:Look at the valuation metrics on Carta and PitchBook for startups in your industry that have recently secured funding. This gives you a benchmark.Determine your valuation by figuring out how much funding you need, when you need it, and how much of your company's equity you're willing to offer. Also, factor in the long-term return on investment, particularly what investors might expect in 7-10 years.
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I have worked for VCs and Private firms for making valuation reports. We, at StockArise, use the Discounted cash flow for calculating the Equity valuation. Yes, the startups are loss-making in the first 3-4 years generally. But after the FCFF gets positive, we take the Intrinsic growth rate (Cap ReIn Rate*ROIC) for calculation of the FCFF. However, if there is a requirement for FCFE, then we take (ROE*(1-div payout ratio). Then we subtract it from WACC to get a discount rate. This discount rate is used to calculate the present values of the future cash flows. Later on, we subtract the net debt from the Enterprise value (sum of PVs + Terminal value) to get the actual value of the startup/firm.
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- Lattif Shaban Director at SUPKEM
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Most critical is what is your niche of the market you will serve. The investor must have access to Upstream and Downstream data and average costs in reaching the customer vis a vis gross profits
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2 Valuation methods
Calculating your pre-money valuation depends on the stage and type of your startup. The market approach, for instance, compares your startup to similar companies that have been acquired or funded, and then uses multiples of revenue, earnings, or users to estimate the value. The income approach, on the other hand, projects future cash flows and discounts them to the present value. The asset approach values your startup based on its tangible and intangible assets, while the scorecard approach assigns a percentage weight to various factors that affect your valuation. Each method has its own advantages and limitations; however, the scorecard approach is more flexible and subjective, making it suitable for early-stage startups that may not have a lot of hard data or metrics.
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- Anshul Gupta Founder @ Bharat Founder School (BFS) | Fundraising Expert | 3X Founder
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If you are an early stage startup (pre-seed or seed) your valuation is really not dependent on any particular scientific logic. It all comes down to demand-supply and some broad benchmarks. Your value is driven by your potential, not what you have achieved so far. Do not allow any investor to peg you to an ARR multiple or similar stuff so early. Thats unworkable.
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Instead of rigid methods, blend traditional approaches with entrepreneurial intuition for an evolving valuation. Apply metrics strategically, adapting them to your industry and growth stage. Embrace ongoing refinement; valuation is a journey that evolves with your startup. Founders lead the way, using a mix of methods. Use valuation strategically to communicate your venture's potential, inviting investors to understand the unique trajectory your startup offers.
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- Sharif M. Haji Chief Executive Officer (CEO) at Tanzania Education and Development Trust (TEDT)
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Here is mathematical and financial modelling part, it really tricky and a bit sophisticated not all people can do that. So, to make things easier for you find professional investment banker to help you out.
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Valuation methods for startups progress from subjective early-stage methods like the Berkus Method and Cost-to-Duplicate, to data-driven approaches like Discounted Cash Flow analysis in later stages.
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- Aditya K. Private Equity Professional at Alcazar Capital | Ex-J.P. Morgan
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In my experience, business plans for a pre-seed/seed startup are taken with a grain of salt. Usually at that stage, subjective methods like Berkus Method are more popular in conjunction with analysis of whether a product market fit exists, whether the market is there or not and whether there is a pain point that is being addressed is being substantial enough among other things.
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3 Valuation tips
Calculating your startup's valuation for angel investors can be a difficult but beneficial process. It can assist in understanding your business, communicating your value proposition, and raising the necessary funding for success. When calculating your valuation, make sure to do research to understand the trends, opportunities, challenges, and benchmarks in your industry and niche. Be realistic about your strengths, weaknesses, opportunities, and threats and how they affect your valuation. Additionally, be flexible with the valuation range or estimate as it can change depending on the market conditions, investor's preferences, and the negotiation process. Lastly, be open to different options and scenarios that can help you reach a mutually beneficial deal.
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1. Dive into your market strategically, beyond norms. Explore nuances for a unique understanding, enriching valuation negotiations.2. Anchor valuation in tangible milestones. Calculate funds for critical stages, aligning with your growth trajectory.3. Approach dilution as a decision shaping ownership. Envision an optimal structure aligning with long-term goals.4. Embrace a dynamic mindset. Avoid fixation on a single figure; be aware of a range accommodating market fluctuations.5. Valuation is iterative. Refine based on market conditions, achievements, and investor feedback, showcasing strategic adaptability.6. Anticipate negotiation scenarios. Consider innovative structures for mutual benefit
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- Pawel Schapiro Investing in VC funds @KfW Capital
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Don't overthink this. Especially at the angel stage, valuation is no hard science. Talk to other founders and friendly investors about typical valuations for companies in similar regions and sectors. You will get a good feeling for the market price.In addition, derive from your financial plan how much cash you would need to get to the next milestone and fundraising round. Assume a 20-25% dilution in a given round and you'll have a rough valuation, based on capital need and dilution. Example: you need 500k to reach the next level and raise your seed round. At a 20% dilution you would raise at 2.5m post-money or 2.0m pre-money.
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A key valuation tip for startups is to thoroughly understand their market and financial projections, and choose a method that aligns with their stage of development and unique business attributes.
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- ِِAbdelrhman soliman Senior Investment Analyst @ Multiples Startup Advisory | Investment Analysis, Startups Valuation, Pitch Deck, Startup Consulting, Fundraising, Data Room, CFA LII Candidate
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Focus on Traction: Investors often place a premium on startups with demonstrated traction, such as revenue growth, user acquisition, or product development milestones. Strong traction can justify a higher valuation.Be Realistic: While it's important to aim for a fair valuation that reflects the potential of your startup, being overly optimistic can deter investors. Conduct thorough market research and financial analysis to support your valuation.Consider Investor Perspective: Understand the investor's expectations and risk tolerance. Some angel investors may seek significant ownership stakes in exchange for their investment, while others may prioritize potential returns.
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4 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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Consider using an experienced advisor who can ensure your valuation aligns with market realities, strategic goals, and potential milestones. An advisor can give you professional guidance, and help you refine your valuation strategy, adapt to changing circ*mstances, and showcase financial acumen during negotiations. Advisors can transform the valuation process from a challenge to a well-guided journey, helping your startup to fundraise successfully
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Additionally, startups should consider investor interest and market trends, ensure a strong and credible team, and be prepared to negotiate, as valuation is often a balance between founder expectations and investor perceptions.
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- Aditya K. Private Equity Professional at Alcazar Capital | Ex-J.P. Morgan
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In addition to setting valuation terms, a pre-seed/seed startup can also look at different types of modes of financing available for them - SAFE agreements, preferred equity, venture debt etc. A decision should be made only after all the options have been considered and evaluated from a business perspective.
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