What is Valuation and The Impact on Your Ownership

What is the appropriate valuation of your business? And why does it matter? This typically arises in the context of raising money for your business. When you are raising money, the value of your business will determine the percentage of your business you will give to investors in exchange for their capital. Generally, your business is worth what somebody is willing to pay for it. And the methodologies applied by one buyer in one industry may be different from the methodologies applied by another buyer in another industry. That being said, there are certain considerations and methods that are used rather consistently by the investing community.

“Convince investors your business has value.” 

Factors That Impact Valuation

The valuation of an early stage company will be determined by a combination of factors. Below are just some of the factors we explain in our Learning Community:

  • Industry Demand. The industry in which a company operates will be extremely important in determining valuation. If a company operates in a “hot” industry, it is likely that it will be able to achieve a higher valuation compared to another company in a different industry at the same stage of development and current traction. This is because in a “hot” industry there will be a greater demand to make investments and more money ready to be invested resulting in higher industry average entry valuations.
  • Market Size. The larger the market in which a company operates, the bigger the potential upside of an investment. Therefore, the bigger the market, the bigger the potential valuation a company can command and vice versa. If your product lies in a high demand industry with low market supply, investors will come knocking with offers aplenty. If you operate in an overly saturated market with numerous competitors, your chances of attracting investors are slim unless you have a distinct competitive advantage. Investors will get a glimpse of your business’ value by assessing your earning capacity based on market demand.
  • Stage of Development. If a business is still just an idea then it is very unlikely it will get the same valuation as a company that has a product in the market with customers or user base.
  • Traction. If a company has evidence that it is gaining amazing traction with really high growth rates then this will demonstrate to investors that the business is on to something and could result in a higher valuation.

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