Based on the two aforementioned valuation methods, a startup can maximize its value by trying to get the revenue multiple or valuation multiple as high as possible. Furthermore, in order to appraise startups’ business models and decide whether to invest or not, investors usually have a set of questions on hand. The more "ticks" that an investor gives for the startup in the question list, the more likely it is to be priced at a high value. Our advice is that startups should focus on researching the market carefully to create great products that are market fit and innovative. Saud Masud, the CEO of the Pakistani VC Vector Partners, reveals 10 questions that are most frequently asked by investors when reviewing your pitch, as follows:
- Is the product/service serving a real need in the market in a unique way?
- Is the opportunity disruptive enough to attract future investments from other early stage investors?
- Is the opportunity large enough to be attractive?
- How well does the offering compete or even better is there a Blue Ocean opportunity (i.e. there is limited to no competition)?
- What is the company’s “unfair” competitive advantage? Technology? Patent? Team? Relationships?
- Is the business model pivotable within a reasonable period? Businesses that can adapt live to fight another day, another market trend.
- Is the business model high margin or mass-volume dependent?
- Is the revenue composition more one-time or recurring in nature?
- Does the team have a solid feel for metrics driving company valuation? Average Revenue Per User (ARPU), Contribution Margin, Customer Acquisition Cost (CAC), Retention rate, Monthly Recurring Revenue (MRR), Life Time Value (LTV) analysis?
- Are there opportunities to significantly increase ARPU or Revenue per Unit, by adding security features or mobile functionality, for example?
From the questions above, it can be inferred that the startup is likely to be highly valued if it is able to achieve high sales, high profit margin, high customer stickiness, large market size, flexible pivot options and most importantly, a top-notch team. Keep these elements in mind and make sure to integrate them into your future pitches in front of "sharky" investors.
Conclusion: This article provides readers with general knowledge about valuation for early stage startups. However, as mentioned previously, the two valuation methods introduced above are among the simplest and most commonly-used ones, especially for pre-revenue startups. Therefore, when the startup enters the acceleration period, makes profit and start to dominate the market (which is typical for the funding round B, C, D, E ...), they should apply absolute valuation methods such as dividend discount model, discounted cash flow model, residual income model, and asset-based model for additional insights. You may find an average valuation of all methods for final reference since some of the approaches are based purely on the investor’s experience and judgment and in the end, valuation is probably an art rather than a science.
- ThinkZone Blog, ThinkZone Ventures, “How to value a startup”:
- Slim CRM, Startup Handbook 2.0, Chapter 5: Startup Valuation.
- ThinkZone Blog, ThinkZone Ventures, “5 commonly used methods for startup valuation”: http://thinkzone.vn/giai-ngo-5-phuong-phap-dinh-gia-doanh-nghiep-thuong-dung
- Vinh Nghi, Vietsourcing, “Business Valuation: Look simple but actually not simple”
- Khawaja Saud Masud (2018), Understanding Startup Valuation, Data Driven Investor, Medium:
- EBITDA for Pharmaceutical and Health, Viet Capital Securities:
- James Chen (2020), Valuation Definition, Investopedia:
- Business Valuation: The Three Approaches, ValuAdder:
- Stéphane Nasser (2016), Valuation For Startups - 9 Methods Explained, The Parisoma Review, Medium:
Soucre article: http://startup.gov.vn/