How To Value a Business

In the startup world, a lot of emphases is placed on valuation. The higher the valuation, the more likely it is that you have a profitable, well-managed and fast-growing company. And the higher the valuation, the more attention you are likely to attract from investors, partners, customers, and the media. At some point, if you can draw a billion-dollar valuation, you’ll enter the mythical world of the Silicon Valley unicorns, where the time-space continuum collapses to a single point, fantastical creatures roam free, and money grows on trees. (Or something like that, right?)

Obviously, it’s a lot harder to value a privately held startup company than it is a public company. With a publicly traded company, the stock market acts as a daily reminder of how much your company is worth at any point in time. Investors are continually buying and trading, helping Mr. Market figure out the correct valuation for your company.

But that’s not true with privately held companies. Chances are, you are a first-time entrepreneur, with little or no track record. Your company might not even have a minimum viable product yet, just a prototype (or, even worse, just a diagram on a whiteboard and a dream). And, if you’re not making money and have not reached profitability, there’s no real financial information for potential investors to analyze. As a result, they are forced to come up with their metrics to examine.

In the tech space, for example, one metric used to value a company is the number of Monthly Active Users. This gives investors a good idea of how many people are using your product, even if nobody is paying for it yet. Even better than the Monthly Active User metric, of course, is the Daily Active User metric — this gives a much better idea of user engagement with your product. In the best of all worlds, you want your customers using your product every day: you want them taking your product to bed with them at night, and waking up next to it in the morning. You want them dreaming about your product, imagining how their lives will change by using it regularly. You get the idea — the more you can show investors that there is a “proof of concept” for your product, the more you can convince them to invest in your company.

But what if you are a first-time startup with no track record, no revenue, no profitability, and no minimum viable product? Here is where things get a little more creative. You might need to resort to metrics like “total downloads” for your app, or “total fans and followers” on your social media platforms to sell investors on the idea that your business should attract a sky-high valuation.

Keep in mind; there is a bit of financial alchemy based around future growth projections. You see, any sophisticated financial valuation model needs to take into account not just what your business is worth “now,” but also what it is worth a few years into the future. This requires peering into the future and making a lot of guesses and estimates about how a certain market or industry is going to evolve. As a result, being able to make a grandiose statement like, “We are going to control 10% of a $10 billion market” is essential. Even if you’re off by a little, you’re still talking about a billion-dollar market opportunity!

So, yes, there are a lot of financial metrics (like revenue and profitability) that get thrown into the valuation mix once you’re an established company. However, things are much more fluid and, shall we say “creative,” if your startup is still in the very earliest stages of growth.

Hey! I’m Tomer, an entrepreneur, and maker. You might know me from Mevee, Crane, and Shots, and now Slides among other products I’ve launched! This article is a part of a more extensive series I’m writing mostly based on my experiences and is mainly made of me and my team’s opinions.

I hope this helps you to avoid making the same mistakes I did, and remember to keep shipping!