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Funding Stages

Because startups typically go through a series of 'funding stages' their valuations can differ after each round of funding, and typically they'll want to show growth between each round, the usual funding stages are as follows,

1. Seed Funding – Typically known as the 'friends and family' round because it's usually people known to the business owner who provide the initial investment. But, Seed funding can also come from someone not known to the founder called an 'Angel Investor'. Seed Capital is often given in exchange for a percentage of the equity of the business, usually 20% or less, with funds raised usually between $250,000 and $2,000,000.

2. Round A Funding – This is the stage that venture capital firms usually get involved. It is when startups have a strong idea about their business and product and may have even launched it commercially. The Round A funding is typically used to establish a product in the market and take the business to the next level, or to make up the shortfall of the startup not yet being profitable. Funds raised usually fall between $2 and $15 million.

3. Round B Funding – The startup has established itself but needs to expand, either with staff growth, new markets or acquisitions.

4. Debt Funding – When a startup is fully established it can raise money through a loan or debt that it will pay back, such as venture debt, or lines of credit from a bank.

5. Mezzanine Financing and Bridge Loans – Typically the last round of funding where extra funds are acquired in bridge financing loans in the run up to an IPO, acquisition, management buyout, or leveraged buyout. This is usually short-term debt with the proceeds of the IPO or buyout paying it back.

6. Leveraged Buyout (LBO) – A Leveraged Buyout is the purchase of a company with a significant amount of borrowed money in the form of bonds or loans instead of cash. Usually the assets of the business being purchased are used as leverage and collateral for the loan used to purchase it.

7. Initial Public Offering (IPO) – An Initial Public Offering is when the shares of a company are sold on a public stock exchange where anyone can invest in the business. IPO opening stock prices are usually set with the help of investment bankers who help sell the shares.

Why are Startup Valuation Methods Important?

When an early stage investor is trying to decide if they should make an investment into a startup he will guess what the likely exit size will be for that startup of a type, and in a specific industry. If a business owner has used methods to show their startup is worth a high amount that investor is likely to invest more into the company.

Using these methods or frameworks is also important because startup companies lack reliable past performance and predictable future performance that most established businesses use to estimate their value so having a way to guess a valuation is useful, even if it is all guesswork and predictions.

Ideally, a business owner should use several startup valuation methods to get the most accurate valuation possible. A business owner will want all of the valuations they come to from each of the methods to be within a sensible average.

For example a startup trying to secure 'seed' investment will offer 10 percent of the company for $100,000. This values the company at $1,000,000 but that doesn't necessarily mean it is actually worth $1,000,000 but the startup is suggesting to the investor that there is a potential for the company to be worth that figure after growth and investment.

Things to Consider When Choosing a Startup Valuation Method

Knowledge of other businesses in an industry and geographical location and what they are valued at is key to figuring out the value of a startup in the same industry and location, which is why several of the startup valuation methods include this.

A business owner should not stop with one approach. Angel investors and business owners will want to use several methods because no single method is useful all of the time. Multiple methods also help a startup determine an average valuation.

Finding this average valuation is important because none of the startup valuation methods are scientifically or mathematically accurate, they are all based on predictions and guesswork.

Funding Stages

Why are Startup Valuation Methods Important?

Things to Consider When Choosing a Startup Valuation Method

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