By Fernando Berrocal

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Launching a startup is a dream come true for every entrepreneur. When establishing a business, one of the most important tasks to accomplish is figuring out how much your early-stage startup is worth. A realistic assessment of the value of your product is difficult to complete, therefore it may be challenging. Here, we'll talk about several crucial aspects of evaluating your startup.

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When your startup is still in its early stages, looking for investment seems like a perplexing experience. This occurs since you won't have a product, a marketing strategy, or intellectual property (IP), etc. to evaluate. It is, therefore, very difficult to determine the exact value of your business shares. Once you’ve figured that out, ask yourself: How do you determine your startup's value when you’re still in the idea phase?

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The most vital element in valuing a startup in its early stages is giving up the assumption that valuation matters. Even though you need a value to put on the term sheet, investors will understand that this figure is pointless until you test your idea in the market. Instead, try to calculate the cost of a year's lifespan; establish a value that will allow you to raise that quantity. Based on how much of your business you are willing to give up, you may then bargain with venture capitalists (VCs).  You merely need to find out how much your idea is worth to them.  Seed-stage investors are aware that they are wagering on the viability of your business idea.

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To determine the worth of your startup, consider if you have a product, an ongoing marketing effort with statistics on consumer interest, a solid track record as an entrepreneur, etc. Your business is essentially worthless unless any of these questions can be answered affirmatively. Although it may sound harsh, the fact is that unless a consumer or investor offers to pay for it, it is practically impossible to determine your startup’s value.

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Whatever value you decide on during your seed round is certain to alter after a product is developed, and you see how much traction it gets. Entrepreneurs may become overwhelmed by this ambiguity;  it’s easy to end up wasting time worrying about how to determine their worth. They are concerned that they will either set it too high and scare startup investors–or too low, and undersell themselves. However, if you can't gather enough funds to turn your concept into a reality, it doesn't matter what it's worth. Since there isn't a real figure to use as a standard, there is no such thing as excessively “high” or “low”. The best way to work out your startup's early-stage valuation is by starting with the actual dollar amount you need to raise. To obtain this, ask yourself:

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• The cost to build the product/service.
• The cities to target during launch, and the expenses of marketing and sales per city.
• The payment to yourself (as a founder) and co-founders.

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With these factors in mind, you’ve got a target number to set. Then, figure out how much equity you’re willing to concede. This can vary from startup to startup, but don’t give up more than 20-30% ownership. Ultimately, you’re aiming to keep it as low as you can.

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Establish the most you are willing to give up; then, choose an initial offer that is less than that–say 10-15%.  Now, you have a valuation for your organization–it’s the figure that allows you to sell 10-15% more than you need to increase the runway. When presenting this number to investors, you can be transparent about how you got it. A VC with experience will recognize that any value is speculative, and they will use your estimate as a basis for discussion. Don't pretend that your valuation is definitive, since you lack data. Instead, make an effort to persuade your investors to support you based on your concept, enthusiasm, and the precision of your vision. If you are realistic about the present worth of your firm, they will trust you more.

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When you add up everything, the final amount may seem intimidating. You could be unsure of your ability to obtain that much from investors based just on your concept alone. Ideally, you would begin with a reliable runway from 15 - 18 months; it's worthwhile to at least aim for that initially. If you can't find buyers, you can frequently negotiate a more limited contract; in such a contract, you start by simply asking for enough to have the product created. You could be amazed at what investors are ready to provide you with.

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While maintaining the same value, you are not requesting money from investors to cover your salaries and fully support a marketing campaign. Instead, agree to seek additional equity after providing just enough to pay for your development costs. Then, you will have to operate on a limited budget and take accountability for your first sales and marketing expenses. After developing the product and gaining your first clients, you return to your investors and urge them to invest additional money–at the same value.

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Now that you can demonstrate something concrete, you can more persuasively argue the value of your firm while also allowing them to witness your product and business plan in action. Investors that are familiar with the startup life cycle are aware that your firm is much more feasible once you've acquired clients. When compared to a desire to pave your full runway up front, they'll frequently be more interested in this sort of arrangement.

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Before testing your concept, don't get too caught up in attempting to estimate its core value. Keep in mind that any amount right now is an informed guess; instead, concentrate on what you will need to get your business through its launch. Investors will only provide you with the funding you require if you can convince them of its viability.

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Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.