At Pre-Startup time the valuation for a directly experienced CEO and a thorough Business Plan is often set at $500,000; so, raising $50,000 then would sell 10%. If the Team is Complete then the Valuation is often $1 million. Is a strong proprietary service or product is credible then Valuation tends to move to:
- a discount on Valuation in Year 3 or Year 5.
The Valuation to Revenue Ratio is often the Key. Here is how you generate a Credible Forecast.
A credible Forecast and a Valuation Rationale should be presented and updated in reports to Investors.
Your Forecasts hang on 2 big issues: A Revenue Formula and Sales & Marketing Costs. Forecast Monthly and update the Forecast at mid-month.
Examples for Revenue Formula and Cost:
- You expect the average sales person to generate $0.5 million initially growing over a 2 year period to $1.0 million each.
- 45% to 55%, even 70% very early, as the Cost of Marketing for Advertising and Social Media Marketing is often appropriate for a high margin business.
Valuation, in early stage companies, uses the Valuation to Revenue Ratio. Identify Valuation to Revenue for publically traded comparable companies, like 4 times annual revenue.
As a private company, use 50% of the Valuation to Revenue Ratio as a rough guide. A Rationale you might add is that your growth rate for the 1st 5 years is way above growth at Comparables.
A Valuation Example: In our 36th month, revenue for the month at $600,000 is a Run Rate of $7.2 million annually. Using 2 times revenue, that puts our valuation at $14.2 million.
Rapid growth can be forecast well and controlled if you re-visit the forecast 2 times per month and if you insist on Measurement and Repeatability.
For more about a measurable and repeatable Revenue Generation Formula, please see my: