This post originally appeared on the Louisiana Technology Park blog.
A lot is riding on your startup’s accurate valuation. We all want to be optimistic about our companies’ worth, but an unrealistic, out-of-market valuation can cause friction with investors. And if you can’t overcome the lack of alignment between what you’re asking for and what the investor is willing to put in, your potential deal can be irreparably damaged before it even gets off the ground.
So how do you arrive at the right valuation for your company? The best way to value your pre-revenue startup is to scrutinize the data you have the way an investor would. Mike Eckert, seasoned investor and chairman of the NO/LA Angel Network, shared his insider’s view with the Louisiana Tech Park audience.
Here’s how to think like an investor to find the value of your pre-revenue, early-stage startup.
Making an Informed Estimate
Mature companies use formulas to determine their valuation, but these formulas rely on revenue, earnings and growth rates — items an early-stage company doesn’t have. Trying to use a valuation formula without this data produces results that are too varied to be helpful.
Instead, pre-revenue companies can make an informed estimate based on comparable startups that just finished fundraising. Look at similar startups with comparable target markets, prototypes or patent potential. Evaluating comparable companies will give you a sense of what your startup is worth to an investor.
Additionally, investors and investor trade groups use databases to make their valuation decisions. You can ask a local investment group to help you triangulate your estimate and arrive at the right valuation.