Founders’ guide to pre-money valuation

Calculating the value of your startup is a notoriously murky field, no more so than at the earlier stages where there is little track record to help guide you. If you’re a founder looking to raise funds you’ll want to understand how much your early-stage business might be worth.

Startup valuation doesn’t work the same way as valuing established companies. Startups come with a high level of uncertainty and often have little or no revenues, so traditional quantitative valuation methods can’t be used. Instead, venture capitalists and angel investors tend to use a mix of more qualitative evaluation models to estimate a business’s worth.

We’ve created this startup valuation calculator and pre-money valuation guide to help you understand how investors value pre-revenue startups and calculate an approximate value of your business.

What we cover:

  • Startup valuation calculator based on the method an angel investor would use
  • Pre-money valuation guide
  • Why value your startup
  • Startup valuation considerations
  • Common mistakes to avoid
  • Downloadable startup valuation guide

Try our startup valuation calculator

Before you start using our calculator to value your business, here are a few things to note:

  • This calculator is designed for early-stage and pre-revenue businesses.
  • Be honest with your answers. Put the shoe on the other foot and ask yourself how an angel investor would answer these questions about your business.
  • This calculator is intended to give you a broad estimate and should not be taken as a precise calculation. When valuing your business, it’s recommended to use around 3 different valuation methods.

Pre-money valuation guide

Calculating a good valuation for your business is a challenging trade-off between appearing grounded yet ambitious to investors, without underselling yourself and giving up more of your company than absolutely necessary.

While as an entrepreneur you’d probably prefer an investor to calculate the value of your company based on its future value, an investor’s instinct is to value it based on its current worth.

The mutually agreed value you reach usually reflects a number of factors, including (but not limited to):

  • The number of current customers
  • Total revenues
  • The user
  • Revenue growth curve
  • The business model
  • The market niche
  • The IP value

Why value your startup?

  1. Raising money
    Potential investors want to know how much their buy-in will be worth. You might be offering 10% ownership – but is that 10% of £500k, £1m or more? What’s the bottom line?
  2. Share options
    You might want to incentivise your team (or yourself) with a share option scheme. This benefit is taxed through the Employment Related Securities (ERS) regime – meaning you need to register it with HMRC and report on returns. Having a valuation to back up your scheme will help move things along.
  3. Selling your business
    Buying a percentage of a company differs from buying it as a whole. The concept of ‘bulk discounts’ is generally applied by buyers – meaning it pays to know what the business is worth when you enter negotiations.
  4. Financial health check
    Periodically valuing your company will help determine if your business model is increasing its value. If it isn’t driving growth, what can you do to change that?

Some considerations when looking at startup valuation

1. Market forces

One of the largest determinants of your startup’s value is the market forces of the industry in which you’re operating. When an investor is deciding whether to invest, they generally gauge what the likely exit size will be for a company of its type and industry and then judge how much equity is required to reach a return on investment (ROI) goal.

There are certain ‘hot’ industries out there, such as fintech, sustainability, AI and healthtech, which can command a higher valuation than a startup at the same stage in a different industry.

Conversely, if you’re operating in a space where the market for your industry is depressed and the outlook stagnant, the amount an investor is willing to pay for your company’s equity is going to be substantially reduced, in spite of any past or present successes.

2. The investor entrepreneur trade-off

As an entrepreneur, you need to secure enough investment to grow your business and reach your startup’s key milestones, whilst maintaining a high enough equity stake to keep you incentivised.

On the other hand, an angel investor’s fundamental strategy to make money is to purchase an ownership share in a company when it is still young, unproven and inexpensive. Then, at a later date, sell that share when the company has achieved its vision and demonstrated its increased worth.

An investor will decide how much a company is worth on the basis of many factors, including how far the business has come (business plan/MVP, profitable, in-between) and how far it can go.

What are some common startup valuation mistakes?

  1. Unrealistic growth projections
    Future growth is the whole premise of a valuation. The whole point of a financial plan is to provide you with a starting point. From there, it’s all about negotiating. Having realistic growth expectations lets you set the parameters of how much you actually need, and the percentage you should give away.
  2. Failure to show profitability
    You may not be generating huge amounts of revenue now, but if you can’t show people you’ll be profitable in the future (even if it’s 5 years from now), why would they invest?
  3. Missing costs
    Don’t forget to factor in all your costs – like taxes, production overheads, wages, leaseholds, annual subscriptions and licence fees.
  4. Getting the unit economics wrong
    You need to be selling £10 notes for £20, not the other way around. If your product costs more to deliver than it does to purchase, you’ve got yourself a problem.
  5. Not allowing for impact of debt
    If you’ve taken out any business loans or money from the government that need repaying, this will impact your future profits. Make sure you factor repayments (including any potential interest rate rises) into your projections.
  6. Incorrect discount/risk factor
    Money in the future isn’t the same as money today. When you’re working out future revenue multiples, you need to allow for rising costs, inflation, and other potential risk factors.

Download your guide to startup valuation

It’s not always easy to know where to start with pre-revenue startup valuation, so we’ve created a downloadable resource to help you.
In it, you’ll learn:

  1. The basic principles and maths behind how entrepreneurs and investors each value businesses.
  2. How market trends and forces influence valuations.
  3. The main methods used by angel investors and venture capitalists to value early-stage and pre-revenue businesses.
  4. The dangers of valuing your business too high or low.

Download the startup valuation guide here and become an expert yourself.

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