Why Valuation Should Guide Your Startup Strategy

When starting a company, aim towards valuation. Many startups do not realize it but decisions you make along the way can affect the valuation of your company. If you start with a sound understanding of what makes one company valuable and another not, you can avoid the pitfalls that will hurt valuation and take advantage of the ones that increase it. If beauty is in the eye of the beholder, then valuation is in the eye of an investor.

Why Startup Valuation Matters

Why is valuation important? If you are an entrepreneur and have started a company or are about to start a company, your success at increasing the valuation of your company will determine how much you will receive when you sell the company. This is commonly known as an exit strategy. I am a big believer in driving the growth of your company from the bottom up. You start small with a vision of greatness and success. This entails sweating the details which should include your team and the people who help you do this. You might think that driving valuation and using it as a basis for your decision making would conflict with taking care of your employees. Nothing could be further from the truth. The greater the valuation the more you can pay your employees, offer them outstanding benefits, and enable them to share in your exit.

How Valuation Is Determined

How do you determine valuation? When you are a privately held company, the company’s valuation is decided by what someone is willing to pay for it. This does not mean it is a crap shoot when you go to raise money or sell the company, instead you can help drive the value up by focusing on certain things. These principles will help you increase the value of your company and if your exit is to sell the company, maximize the selling price. They are not something you do when preparing your prospectus just before a sale of the company or funding round, they are guiding principles you live by as you grow your business day in and day out.

Valuation and Fundraising: The Simple Math

How much money should I ask for? When raising money with a certain amount in mind, a basic premise is the higher your valuation the less chunk of your company you need to sell to reach that goal. If you need $100K and you have valued your company at $1M, then you will be selling 10% of your company. If an investor thinks your valuation should only be $500K but you still want to raise the $100K, you will have to sell 20% of your company. No matter how sophisticated your product is or complex your business model, this basic math will always hold true.

Here’s the basic formula every founder must know:

• Need to raise $100K?
• If your company is valued at $1M → you sell 10%
• If it’s valued at $500K → you sell 20%

Higher valuation = less equity lost for the same funding.

Your goal: Raise smarter, not harder.

10 Questions That Impact Your Company’s Value

Having some guidelines you should use is helpful in determining whether you are on track towards building valuation. Remember that your company’s value is determined by the amount someone is willing to pay, here are some questions an acquirer or investor might be asking.

Investors and acquirers ask the same core questions. Your ability to answer these will define your future valuation:

1) How good is your team?

I believe in something I call the Triad of Success. There are three functions that every successful company must have. Sales, Operations and Engineering. They are all equally important and if you are missing one of these functions or are weak in one your company will suffer.

2) What is the size of your target market?

The bigger the better but don’t boil the ocean when you choose a large market. When you start, target a segment of a large market and then plan to pivot or cross the chasm into another segment. This is a proven process and one that will enable you to start generating revenue without going broke.

3) What is your value proposition?

Sometimes called your Elevator Pitch. If you cannot explain your value in the time it takes to ride in an elevator, start over.

4) Are you selling your product already?

After discovery you need to validate your idea by having people pay for it. This will confirm your pricing, gross margins and value proposition.

5) What is your gross margin?

Know what it is, how much it is and always work towards increasing it. Plan your business expenses against your gross margin, not your top line revenue.

6) Do you have a repeatable business model?

It is much easier to sell to an existing customer than selling a new one. For every dollar in lost revenue you’ll need to match it with new revenue before you can increase your revenue. Strive for a very high repeat rate.

7) Do you see your company as an acquisition target?

This is an exit strategy along with going public if you expect to be able to sell the company. If you are aiming for an acquisition consider this when choosing partner companies. Many times it is a partner that becomes the acquirer.

8) Do you have a sales and marketing plan?

You have gone through your discovery and validation periods, now it is time to scale. Take the time to write a plan.

9) Is your solution a disruptor?

If you want to make the big bucks, be a disruptor. To do this typically takes more startup capital then simply improving on an existing process.

10) What will you do with the money?

Every investor will ask this question. That is where the plan comes in.

Build Smart, Exit Strong

Startups are hard. But they become harder when you don’t align your decisions with long-term value.

This isn’t just about numbers. It’s about mindset. About sweating the details, hiring right, focusing on a big market, and creating a product people will actually buy again and again.

Build the business investors want to buy. And do it with a team that shares in the outcome.

This is a guest blog post contributed by Brian Gorman, an entrepreneur, SCORE mentor, and Yankee fan. If you’re ready to build your exit strategy and are looking for more insights on bootstrapping, growth, and startup success, visit his website.

Are you interested in contributing a guest blog post? Fill out our contact form.