How to Determine Valuation?
Seed Stage: Early-stage valuation is described as an art vs. a science. If we describe valuation as a science, these factors influence the outcome:
Traction: Out of all things to show an investor, traction is the number one. The point of a company’s existence is to get users and if the investor sees users, (real, not Facebook bought Likes), they get excited. If you have 100,000 customers you have a good shot at raising $1M (assuming you got them within 6-8 months). The faster you get them, the more they are worth.
Reputation: There is the kind of reputation that someone like Elan Musk has that would warrant a high valuation no matter what his next idea is. Entrepreneurs with prior exits in general also tend to get higher valuations. But some people received funding without traction and without significant prior success. Two examples are Kevin Systrom, founder of Instagram who raised his first $500k in a seed round based on a prototype – Brnb. Kevin worked at Google for two years, but other than that he had no major entrepreneurial success. Pinterest founder Ben Silbermann the same. In their cases, their respective VCs said they followed their intuition. If you can learn how to project the image of the person who gets it done, lack of traction and reputation will not prevent you from raising money at a high valuation.
Revenues: Revenues are more important for the B2B startups than consumer startups. Revenues make the company easier to value. For consumer startups having a revenue might lower the valuation, even if temporarily. If you are charging users, you’re going to have slower growth = lower valuation. A startup is not only about making money, it’s about growing fast while making money. If the growth is not fast, then you’re looking at a traditional money-making business.
Distribution Channel: Even though your product might be in very early stages, chances are, you have a distribution channel for it. It’s easier today than ever before through social media platforms and apps to get real users but they can be temporary and not given a great deal of credence unless they are consistent buyers.
Hotness: Investors do travel in packs. If something is hot, they may pay a premium. This is where science goes out the window.
