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_This is a revision of Amit’s Question from Tues May 8, 2007_ Every startup wants to believe that they are unique and revolutionary, it is no different in our case. We do have a business model and revenue projections but after reading several articles on startup […]

_This is a revision of Amit’s Question from Tues May 8, 2007_

Every startup wants to believe that they are unique and revolutionary, it is no different in our case. We do have a business model and revenue projections but after reading several articles on startup valuation and listening to Guy Kawasaki, it seems like basing your valuation on revenue projections is not a sound strategy. Investors seem to prefer something more tangible, ie. assets, patented technology, user base, etc. Our competitors are privately-held, so we have no information on their revenue or other metrics to use to build a comparative valuation for our company.
Let me rephrase the question:
What are rules for a startup to build a sound valuation without using revenue projections?
What are the assumptions one should take into account?
When you are approaching angels and have no revenues or patents or other comparative metrics as yet, how do you justify 10% equity with X dollars? Is it OK to just base it on revenue _projections_?

  1. So called ‘comparative analysis’ is good to do when you’ve already got revenue, COGs, and overhead…so you can compare how you’re doing to visible competitors. However, the way this question is framed makes me think that you’re afraid to ‘throw down’ a business model and layer them with growth projections based upon an estimation of the size of the target audience.

    Since you’ve got ‘no direct competitors’ you are either a genius/visionary or your idea simply doesn’t have a business model that can support it.

    :-) Bogus Jones}

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  2. Every startup wants to believe that they are unique and revolutionary, it is no different in our case. We do have a business model and revenue projections but after reading several articles on startup valuation and listening to Guy Kawasaki, seems like basing your valuation on revenue projections is not a sound strategy. Investors seem to prefer something more tangible, ie. assets, patented technology, user base, etc.

    Let me rephrase the question, when you are approaching angels and have none of things I mentioned above as yet, how do you justify 10% equity with X dollars? Just base it on revenue projections?}

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  3. I agree that angels/VCs are looking for something concrete on which to value a company – a good business plan is key, of course, but you need to have built something to get interest unless you can stand on the strength of your reputation alone (a la Friis, Rose, etc.).

    Let me ask you this – why are you approaching angels if you have no technology, no users, and no assets? Is your business plan predicated on heavy initial investment into unproven technology? If so, you’re going to face a tough sell – in my experience, those businesses usually come out of college research labs and corp think tanks where a prototype can be built before the team goes looking for production money.}

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  4. We have technology, just no patents yet. We have bootstrapped for the last six months to build our prototype. However, to launch a beta product we really need cash to make it happen. You can only bootstrap so much. If we were building a web app it would be so much easier but our software app is targeting smart phones.}

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  5. first off…why don’t you have revenue projections? If you have no clue what you’re going to be making in 5 yrs, why are you working so hard on this? How do you know it’s worth your time?

    IP is a way to defend your projected revenue stream. You definitely need something to build a wall with to keep competition out.

    And you can always get information on your competitors if not directly then indirectly – what have they bought? How big is their office? Go there during the day and count the cars. Do a scan of their servers, how many different aliases are they using for their inband applications? That gives you an idea of their scale and you can extrapolate.

    Amit: he’s a stab for you: Build a smart phone simulator. Search around, you can probably find the software (it might not be legal, but hey, look at Apple back in the 80s)}

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  6. “After reading several articles on startup valuation and listening to Guy Kawasaki, it seems like basing your valuation on revenue projections is not a sound strategy”.

    Are you sure? Revenue projections is the one sure way to assess a company’s potential.
    I’d recommend you break it into two steps – (a) Revenue projections tell you big the market is – and how much your business could be worth and (b) “Assets, patented technology, user base” are just means of assessing if your business model is defensible? Is there a substinable advantage that you can build that will allow you to eat a large fraction of the total market?

    If both (a) and (b) are in your favor, its all yours. Otherwise, good luck getting funded!}

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  7. Amit,

    Why are you trying to establish a valuation? If it is because you are trying to raise money, your valuation is the market clearing price. Things are worth what people pay for them. That’s it.

    Decide how much money you want to raise in this round.

    Once you have the $ amount established, your angels will probably ask for 10%-20% of the company in return for that amount.

    Alternatively, do a debt round. More on debt here: http://www.venturehacks.com/term-sheet-hacks#convertible-debt

    Decide how much $ you want to raise by figuring out how much it is going to take to do your next round at a 2x-3x increase in valuation.}

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  8. [...] wisdom. Here’s a list: 1) Settling on the startup idea. 2)Funding it. 3) Launching it. 4) Valuing it. No comments Share/Send Topic: FoundWatch, Lessons Tags: bootstrapping, funding, [...]

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  9. Or you could use actual post-money valuations found at http://www.pedatacenter.com. I’ve found that they are by far the best online source for industry comps. Pretty cool database that not many people know about yet.

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