How Do I Value My Company?

There’s a lot of debate about valuations – to the entrepreneur starting out, valuation can seem kind of like alchemy.  So we thought we’d break it down a bit for you.

Why is valuation important? Because your company’s valuation affects how you raise money over time, and a number of other issues like value of equity, etc.

What is it?  Simply put, putting a value on your business.  But in practice, perspective and beliefs about the world will have a big influence on the valuations that different people arrive at.  So it’s a lot like saying “How much is this car worth to you?”  The public transportation rider who doesn’t have a car might answer differently that the daily car commuter, or the taxi driver.

What are the moving parts?  First and foremost, value revolves around the value of assets and liabilities – be they:

• intellectual property (I have no revenue, but I found the cure for cancer),
  
• profits (I don’t have the cure for cancer, but I have $100M in revenues and $50M in profits annually), or
  
• revenues/market share (I have $1B locked up, and although we’re not yet profitable, we control the market).

Also important, but not always available, are comparables.  If you can find a company which has been funded or sold recently, you can compare yourself to that company, and use it as evidence for the valuation at which you arrive.

How do I determine valuation?  Many people just pick a number.  If you have no patents, no customers, no revenues, then you may just end up doing that.  But at minimum, you should be able to explain how you got to the number.

Here’s a valuation calculator which is a little more simple.