Traditional financial modeling aside – How we evaluate startups at UP21

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“Early-stage startups typically don't have stable revenue streams, not to mention profit. To determine their value, we can't use any of the financial models that are being taught at universities and used at more mature companies,” says UP21's analyst Anna Efros. How do we evaluate startups, then – and how can you do it yourself prior to meeting a new investor?

The value of an early-stage startup is of course dependent on a number of factors like how developed your product is or what team you have at hand. The most crucial factor when determining the value, though, is your total costs of running the business in the next twelve to eighteen months.

“If we can't yet build the valuation on revenue or profit, we need to take expenditures into account. Each and every startup should have them mapped and included in their financial plan when they're meeting us or any other investor for the first time,” explains Anna.

And it's expenditures that will help you at least estimate the value of your project before you begin to negotiate the terms of the investment. Why bother? Because it's obvious and understandable that you want to get the investment as “cheaply” as possible, meaning you will be trying to give up the smallest possible share of your company for the maximum amount of money possible.

Anna Efros, UP21 analytics

So, how do you valuate your startup using your existing and future costs? Anna continues: “With early-stage startups, we do a so-called post-money valuation. Let's say you're after 1 million euro worth of investment, and you're willing to give up a quarter of your company for this. Your post-money valuation is then 4 million euros. Notice that post-money valuation of your startup includes the money your potential investor brings to it – hence the term “post-money”.

Determining the existing value of your startup - the value in a world where the investment for whatever reason doesn't go through - is just as logical as you'd expect: “The value of a company prior to post-money valuation is basically post-money valuation minus the amount the investor brings in. In the example above, pre-money valuation would be 3 million euros.”

And how does it work in real life when you're presenting your project in front of UP21's main board? Just the same, only from the other end of the deal: “We always know in advance what percentage of the project we'd like to get in exchange for our investment and incubation.

We then look at the financial plan the founder has prepared and look for ways to begin the cooperation under terms that will be financially beneficial for both sides. It goes without saying that the minimum every founder needs to have in their head when approaching an investor is how large the investment should be and how long it will last given the current stage of the startup and its near-future plans. Future revenue or profit are not important at this point, it's too early for this in an early-stage project,” adds Anna.

The valuation process will inevitably change once you get closer to Series A and other investment rounds, not to mention the desired phase of the company when it's generating profit or even gets ready for an IPO. But more on this later.

Anna Efros consults UP21's startups on a daily basis, focusing on their operations, finances, and raising funds. Part of her job is screening the market for investment opportunities and performing due dilligence, detailed work with financial models, and perfecting business plans. Last but not least, she help with establishing partnerships and work closely with UP21's CFO on managing the startups’ financial matters.

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