Know your worth... and your pre-money valuation.
When I was out walking the dogs this morning, I was captivated by the "business end" of a fundraising campaign: agreeing term sheets and, ultimately, valuations. It is a great place to get to with clients, but the pressure always turns up, and so does the intensity.
"How do I value my company fairly?" It is the most frequently asked question from new clients, so here are a few ways we crack this nut.
Understanding valuations
The first thing we need to grasp is the purpose of a valuation. Valuing the entire business simply gives the value of your shares. During a funding round, you create new shares, at a new value, and you sell them. We use the pre-money valuation because it is the price before any money changes hands.
Calculating your valuation
There are only two scenarios: you have traction or you don't. If you have no traction and you are raising your first round, it is best to use a default valuation. If you have traction, you can use a revenue multiple.
I recommend keeping this simple. The more complicated it is, the harder it is to convince an investor of its weight.
- Default valuation. Selling 20% of the business in a £150,000 SEIS funding round means your valuation would be £600,000, with a post-money valuation of £750,000.
- Revenue multiple. If you have a year of revenue traction, you can apply a 5x multiplier to it. If this is too low, you can take an average of Y1 (actual), Y2 (forecast) and Y3 (forecast) and apply a 3x multiplier.
Why your valuation matters
Your investor can only make money when they sell their shares. The biggest risk of starting with a high valuation is a "down round". If you raise money today, how will the market react next year? Will you reach a £5m valuation? If not, then we can't invest. This means there will be additional scrutiny of your company's valuation during later-stage conversations.
I always recommend going for a valuation you are comfortable defending. The best way to defend any valuation is to sell shares at that price. This is where momentum comes in. Finding a lead investor who validates a share price is priceless in your funding round.