Posted: Wed 28th Sep 2022
Here are five easy steps you can follow to make valuing your business simpler.
When a start-up raises investment, the total number of shares increases with new investors – meaning existing shareholders have a smaller share of this new capital and their investment has become diluted.
Ideally, you don’t want to be diluted more than 10% or 15% by a round. To calculate dilution you can use the following formula:
Dilution % = amount invested / post-money valuation
The post-money valuation is the valuation of the round plus the amount invested. So if your investors are investing £500k and you are prepared to accept 15% dilution, your post-money valuation would need to be £3,333,333.
Multiples vary by sector, scalability of the start-up and stage of growth. Do your research by looking at standard multiples for your sector – there are various public data sources that discuss multiples on exit and IPO via sector.
Research the valuation at which other start-ups in your space have raised investment at different stages both in the UK and abroad. For UK start-ups, you can find this information on Companies House via Form SH01s – these show the price paid for the shares and the total number of shares in issue.
For non-UK businesses use public platforms such as AngelList.
Investors in early-stage start-ups tend to calculate the valuation by applying a multiple to the revenue forecasted to be achieved by the start-up 12 months after the investment round.
For example, if your startup has a 2.5x multiple and the investor is looking at forecast revenue 12 months after the round, your revenue after 12 months would need to be £1,133,333.
Investors make an initial decision based on your pitch deck, so it has to be flawless and enticing. If they do not get excited by the deck, investors won’t bother looking at the financials.
It is therefore extremely important that the information in the deck matches the forecasts, grabs their attention and is accurate.
It is so easy to get someone else to put your numbers together, but they can also mess up a formula and result in incorrect figures. Not understanding or having major errors in your financial forecasts can be terminal to conversations with investors, so make sure that you understand and can justify every single number.
Valuations of start-ups are sky-high at the moment, and a start-up with a good business plan, forecasts, a strong founder team and a great idea can easily raise the first round at a £5m valuation.
However, that level of valuation is more than just wishful thinking, it must be supported by coherent and supportable numbers.