how do you calculate the value of your startup
how much is your work worth?
Hey there,
Welcome to the 123 new members that just joined Project Arrow’s newsletter - a weekly email focused on helping founders how to build from zero to one and become investable.
This week we’ll talk valuation - namely how do you calculate the value of your startup before starting raising money?
This is probably the most frequent question we get at Project Arrow - particularly a difficult topic for early stages founders, when the company generates little to no revenue, and which makes close to impossible the standard process of evaluating the stream of discounted cash flows.
So how do you go about estimating how much is your startup worth?
Top down approach Decide how much money you will be asking and how much equity you want to sell. Assuming you need $1 million and you want to sell 20% of your company’s shares, that means you’re expecting a company valuation of $5 million, pre-money.
Bottom up approach Decide what you try to accomplish by raising money, in a tangible way that’s easy to put a number behind it. Examples of such milestones include launching the 1.0 version of a product, opening a new market, or getting to 100k paying customers. Once you settle for this specific objective, work your way up the market - that means you should calculate how much money you need to get there, ideally in a spreadsheet detailing a cost structure that supports your go-to-market strategy. Correlate the number with your objective and with the first approach detailed above.
Benchmark the market Research what other startups raised at your stage, in your industry, and/or with your business model.
As you can see, there’s no standard way to find out the value of your startup, if your company doesn’t have a sales record and paying customers. That is why your pitch should focus on selling conviction and not numbers - conviction is the opportunity you are trying to pursue, and the supporting elements that make it an interesting story: the market dynamics, the total addressable market, the customers or the current industry trends.
Go through each of the above and play with the numbers. Use a spreadsheet to create scenarios and figure out what’s acceptable for you and it’s feasible to negotiate with potential investors. Settle for a high and a low range, that you can later test against investors appetite when you pitch them. Let me know if you have questions - or better off, join Project Arrow, where we can dig into more specifics based on the specific valuation of your startup.
Talk to you next week,
Dragos
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