How to do pre-valuation of a web based startup?


1

We are a 3 month old, 3 part time team startup, working on a SaaS based web product. Can someone tell us how to do a pre-valuation of this startup?

Well, just to add, our Alpha product is ready and we feel comfortable to pitch it to potential customers.

Valuation

asked Jun 6 '11 at 05:39
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Essyum
6 points

4 Answers


4

Sorry, but your question doesn't make much sense.

First, valuation only matters when you negotiate with potential investors, not customers.

Second, valuation is arrived at by negotiation, based on what the market (one or more investors) are willing to buy shares for, and what you are willing to sell for.

That being said, a technology startup in Silicon Valley today, at your stage, is usually assumed to be worth no more than $1M. Assuming you have amazing potential, and that you started working on it.

Stuff that increases valuation: 1) paying customers; 2) a product that has shipped.

answered Jun 6 '11 at 13:09
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Alain Raynaud
10,927 points

3

There is no one true way, you pretty much have to triangulate it from various standpoints and to get a feel and better understand it yourself.

Market Value. Currently it doesn't have any value besides what someone is are prepared to pay for it.

If someone likes the idea and is prepared to back you then you will need to be able to pay for 1.5 to 2 years with 3-4 people being paid $X each say $80,000.
But you will need sales and marketing and advertising and hosting costs and ... the list goes on.

For your specific case work out what these costs are likely to be over a 2 year period to acheive a nominated and realistic goal: 1000 clients in 2 years ... beak that down into clients per month and then per week and you soon realise its a real number.

Have the income spreadsheet with each client coming on paying $X per month for the product. Have the outgoings per person per month on the other spreadsheet.

The third spreadsheet is Amount needed = SUM(Income - Costs) for 2 years.

So you have the first metric.

Effort so far. You can give it a value by calculating the amount of hours each of you have put in (say 200 each) and saying what job could you have been paid for with those 200 hours. Hourly rate of say $30 per hour.

So 600 * $30 per hour gives you your direct "oppurtunity cost". You then put a multipler on this like x3 or x4 to say the value now created could be purchased outright for 600 * $30 * 4 and that would be a reasonable 100% buy out price if we didn't have to do anything on it ever again. This is your baseline sort of metric

The potential metric. The next metric is the "potential" metric otherwise known as the marketing BS metric.

  • You say "how big is the total potential market" say 20,000,000 users
  • then you say "how much of that market as a potential can we hope to get in 2-5 years". We think upper limit would be 20% of this.
  • What is the value of that at our Saas rate per month ongoing for the 5 years. $20 per month * 20% of the market = $LOTS and early retirement for all.

This gives you your upper bound number that you can present as the carrot to VCs and other investors "with your help we could hit this" is pretty much the statement you want to make.

You then have to do the sanity check of how many clients per month would have to sign up to our Saas to make that happen and the answer is bucketloads ... if you can then answer the question "How do we consistantly get bucketloads a month signing up and continually paying" ... go for your life you will get backers.

In summary This gives you a high, medium and low point to start working from when costing the company ... really at an alpha stage its worth nothing until people start to sign on.

You should run through the above senarios, especailly the first one as it is the most realistic set of numbers you will need when hunting for your first round of investment.

Your effort so far justifys your sharholding in the company (totalling around 70% to start with) giving 30% away to investors which aim to cover you for senario 1 for around 2 years.

answered Jun 6 '11 at 14:39
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Robin Vessey
8,394 points

0

Take an estimate of the cost to get you where you are today - and that includes billing a reasonable rate for the development. That's what you have, and to someone interested in investing in your business, it's about what it's worth today.

If you've put in 1000 hours of development, then figure that to be worth somewhere in the area of $20,000 to $40,000 depending on where you're located, and the level of experience of the people involve. Add to that any legal and miscellaneous outside costs, figure another $5,000. So for this example, you would have a current value of somewhere between $25,000 and $50,000.

That being said, an investment of $100,000 will not buy the investor your entire company twice over, since they may give some credit for having the idea (impossible to value based on your description), plus the post-investment valuation would be about 65% to the investor even without this credit (investment / [current value + investment]).

answered Jun 6 '11 at 12:24
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Elie
4,692 points

-1

There are many ways to do the valuation... but as a discussion starter here is a quick and dirty way.

From your business plan, take the 5th years net income. Let's say its 5MM. Let's give it an earning multiple of 2. Don't fall into the trap of "Well groupon got 150x earnings..." it's not apples to apples when you don't have revenue yet. There is a lot more risk.

So you have 5MM x 2 for a denominator in our equation of 10MM. Now we need a numerator.

Take the amount of money you are looking for in the first round, lets say $500k. If we are assuming a 5 year exit, what amount of the above mentioned 10MM will the investor want for their 1/2 mill? Well, a decent starting point is 50% annual compounded for such a risky investment. So to achieve that, their investment needs to be worth ~3.8MM in the 5th year or 7.5 times the invested amount.

The results:

Numerator: 500k x 7.5 = 3.8MM
Denominator: 5MM net income * 2 earnings multiple = 10MM

Divide and the 500k is worth 38% of the company. The talking points are the risk multiple, the earning multiple, and if the 5th year net income is realistic. Enter the entrepreneurial investment sales person.

Hope that helps some.

Bryan Howe, CEO

answered Jun 6 '11 at 09:13
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Bryan Howe
1 point
  • More likely investors are looking for 20x. Not 7.5x. And it looks like you are going about this all backwards. You don't arrive at a valuation by guessing what the company will be worth in 5 years. – Tim J 8 years ago

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