Most young businesses will require investment at some point, if they are to continue to grow. Whether you need to develop an online presence, buy some new technology to remain competitive, hire more staff or move to larger premises, it’s likely that you’ll need additional funding from investors and external sources.
Fortunately, you’re not limited to banks and traditional financial institutions any more. Crowdfunding, venture capitalists and angel investors all offer funding to specific types of companies, if it’s likely they’ll eventually make money by investing.
Businesses are often valued by a multiple of profit although this isn’t always the case and what may be a suitable way of valuing one business may not be for another. In essence, investors want to know that the value given indicates that there is money in your business and seller demand, should you decide to sell at some point in the future. They will be looking for a realistic figure and by the time you approach them, will already have an idea of the sort of value you should be giving them.
Before you start approaching potential investors, you should be aware of the necessary procedures you’ll need to follow and the information you’ll be expected to provide. Valuing your company is a vital part of the investment process. However, most start-ups struggle to evaluate their ventures accurately when they approach investors for the first time.
If you find that the valuation process has been relatively easy then in our experience, there’s a good chance that your valuation is wrong. We have usually found, when assisting our clients with a business valuation, that there is either little or no business history, no or little traction, or its achievements to date might be difficult to quantify.
There are several factors which should be taken into consideration when you begin to value your business, the most important being the clarity and strength behind your business plan, which should also be realistic. Team completeness is also important, if as all or most of the key skills are retained in-house, you as the business owner can then dedicate more time to running the business.
Without doubt, potential investors will investigate the attractiveness of the market and potential exit, even before asking how much money can be made and how soon.
The more complete the product you can show them, the better. This could include MVP, a working prototype, beta or even the ready product. Traction, such as how much value has been created in terms of partnerships, user base and sales will also be analysed, as will the cash already invested in your business from your own pocket, from current or past investors or other sources.
Although each investment offering is different, there are generally accepted guidelines as to how much investment you should request, dependent on the factors we’ve just outlined and the stage of your business. As a rule, early stage companies should be looking at requesting the following funding ranges, although a valuation might increase or decrease over time, dependent on specific circumstances and assets including team experience, IP, impressive sales and market situation.
– Up to £450k if the initial MVP is done, the business plan is clear and the team is almost complete
– £450k – £750k if there is a working prototype; the first customers are in place; the team is working full time, cash has already been invested in the business and there is a very attractive market with good chances of making money
– £750k – £1M if the proposition is very attractive to investors with a booming market, first revenues in place and a complete team
– £1M+ if you have a revenue making business with strong traction and financial forecasts
Angelika Burawska is COO of Startup Funding Club
Further reading on investors
