How investors value startups, using examples like Instagram, and details methods to determine and boost a startup's valuation for fundraising success.
How investors value startups, using examples like Instagram, and details methods to determine and boost a startup's valuation for fundraising success.
hello everyone this is Alejandro crates and today we're going to be talking about how much is your startup really worth so here's the deal there are so many startups out there that have crazy crazy valuations without really not much to showcase for I mean let's talk about for example Instagram so Instagram went from like nothing to a billion dollars in valuation in absolutely no time so today if you're wondering what your startup is worth how can you achieve you know an amazing valuation this video is for you and then also thinking or trying to determine what is the valuation of your company is a critical point if you stay until the end of today's video I'm going to give you a really nice tip that could help you in boosting your own valuation so with that being said let's get into it so why startup valuation matters so essentially your startup valuation is critical it's going to be a
critical thing that you're going to be using during your interactions with investors where you're negotiating what could be that potential deal on your next R of financing knowing your valuation is going to make all the difference now there's one thing that you got to keep in mind that signaling is everything and what this means is that when you get out there when you're engaging with investors you now you know they're asking you more in detail about your financial model your numbers what could be the the potential value of the company you got to keep a couple of things in mind one is obviously you don't want to be throwing the valuation first because in this there's a game right so whoever talks first is going to lose if you talk first on the valuation they're going to negotiate you down if they talk first you're going to negotiate them up so what you want to do is you want to find a
medium a medium where you're able to keep that number tied to the vest but only disclosing in the event that you need to now the other thing to keep in mind too is that 90% of startups fail and one thing of the journey is that you need to know that signaling matters and what I mean with this is that when you go out and you start throwing numbers around the investor is going to feel whether you have been able to do your homework or not and that's why having a conrete value in your business is going to make all the difference so what determines a startup's value so there are multiple factors that can come into place as part of the valuation of the business it's not so much the financial model or only the financial model with let's say the projections the amount that you're thinking about raising all of that is important don't get me wrong but there is other things that are going to come
into play that are also going to be extremely important and those are the following traction reputation prototype and Industry Trends so let's go one by one so traction again is the momentum the progress that you're able to showcase for the business the reputation is critical I was for example speaking with a Founder the other day that told me hey I was I was reaching out to investors I got a 5% response rate but then I went to Stanford and by going to Stanford I was able to increase my response rate from 5% all the way to 90% and because I was like literally sending them emails from my Stanford email account so that reputation you know like those signalings that you're able to send from the company that you worked at before from the University that you actually studied at are also going to be super important industry Trends are also essential why because for example the hype that is in
your Market is going to really push you know things forward for example now artificial intelligence AI everything is AI investors are all over AI so there's going to be Hypes you know in certain segments where it's going to be higher or lower and that is going to be changing over the course of time and then the other thing to keep in mind too is what you're able to Showcase what kind of tangible thing you can show to those investors and typically that's going to be the Prototype or some sort of minimum viable product where you're able to Showcase to them how things are looking obviously the more tangible that you can make it the better it's going to be but you got to be careful too because you don't want to weigh too much uh when it comes to showing that uh tangibl of your business because if you wait too long then obviously you may be too late for those investors that you're looking to
Target and too early for the investors that are going to want to take a look at what you're doing on the next financing cycle and typically financing Cycles they are between 18 to 24 months now there are also negative factors which are going to be decreasing your valuation and those are the following poor industry low margins desperation so for the poor industry I mean it's just like we discussed earlier you want to be at the right High time in history and you don't want to be in a segment that is essentially slowing down the market is decreasing the compounding anal growth rate is really not at a rate that is appealing to investors because in the end the size of your market and how that market is growing over the course of time is also going to justify their potential returns and the risk that they're putting by investing in your business the other thing to also keep in mind is the low
margins to put an example in e-commerce and your gross margins are 40% it's going to be very difficult again for them to justify that so again keep in mind you know your margins and what is going to be your take-home after all the operations you know and all the effort that you're putting into this and then the other thing too is the desperation you know the signaling that when you go out there you got to really keep in mind that it's not all about mastering your storytelling which is your narrative your pitch sck the financial model but then also the way that you're engaging with investors because keep in mind that when you're out there and when you're mastering the process itself of fundraising there's going to be psychology strategy and methodology all coming into one one thing to again you know master in this place is that you do not want to seem desperate in many instances I see
Founders that go at it you know on the fundraising journey and right away you know they just are blindfolded they don't know what to do they start acting desperate you know because they really need the investment and that can really come and and and and hit you back don't be desperate understand that fundraising is very systematic you got to go from point A to point C and know exactly what needs to happen from one point to the next now the other thing also as part of that desperation to avoid it don't try to raise money when you are completely out of Runway you need to raise money when you have enough Runway enough oxygen so that you can leverage that so that you can raise around on your own terms so with that being said I want to touch on the different valuation methods for your business The Venture Capital method which is the method that calculates valuation based on expected future
Revenue investors estimate your startups exit value and work backward to today's valuation then you got the verus method the verus method assigns dollar values to different parts of a startup if you check all the boxes your startup could evalu at 2 to 3 million before making a dime then you got the scorecard valuation method investors compare your startup to others in your space and adjust based on strengths and weaknesses if similar startups are valued at 5 million and yours is stronger your valuation could be higher then the risk factor summation method this method adjusts valuation based on 12 factors like management strength market demand and legal risks then you got the cost to duplicate method this calculates how much it would cost to rebuild your startup from scratch the downside it doesn't consider future growth then the discounted cash flow the DCF method if you are generating
Revenue this method predicts future cash flow and discounts it back to today's value and then the valuation by stage method where investors use this for a quick estimate based on Milestones if you have a working prototype your valuation might be 2 million if you have customers it would be over 5 million and lastly the first Chicago method this method gives three valuations the best case the worst case and normal case it helps investors see the full risk reward picture so what is the secret to boosting your valuation that I mentioned that I was going to give you the secret is very easy the secret is that you you want to showcase a story of growth you want to showcase traction you want to showcase momentum and you want to build that so that the investor is able to really connect the dots think about for example WhatsApp they were acquired by 19 billion by Facebook I mean even one of the
founders of…