Entrepreneurial Finance: Applied Frameworks

Startup Valuation: What Investors Look For

No revenue yet? No problem! Here’s how investors value early-stage companies.

1. The Venture Capital (VC) Method (Backward Looking)

• Investor’s Goal: Make a huge return (e.g., 10x-30x) in 5-7 years.
• How they think:
  1. “What do I think this company will be worth at exit (acquisition/IPO)?” (e.g., £100M)
  2. “What ownership percentage do I need today to get my target return?” (e.g., if I want 10x on a £1M investment, I need £10M at exit, so 10% of £100M exit value).
  3. This determines the Post-Money Valuation of the current round.

2. The Scorecard Valuation Method (Comparative)

• How it works:
  1. Find the average pre-money valuation of similar, recently funded startups in your area/sector.
  2. Score your startup (e.g., 0.5x to 1.5x) against benchmarks on factors like:
     • Team (MOST IMPORTANT)
     • Market Size
     • Product/Tech
     • Competition
     • Partnerships
  3. Multiply the benchmark by your score to get your valuation.

For Founders:

• Understand both methods.
• Justify your valuation with your team’s strength, market opportunity, and traction.
• Always model dilution before agreeing to terms.

Golden Rule: Valuation is more art than science at the early stages. It’s a negotiation!