venture capital company valuation

How do you value a startup company that isn’t publicly traded and has no revenues?

Valuation can be a black art even when you’ve got revenues and a record of expenditure you can use to calculate projected profits over a number of years. After all, who is to say that those profits will stay constant? What if a competitor comes out with a product that’s going to give your company a run for its money?

How to Value a Company. Use the Tools and Avoid Common Mistakes

Valuation can be very subjective. And again, if you’re dealing with a startup, there are so many variables it can be tough for an entrepreneur or investor to know where to begin.

• (Download our simulation tool that helps companies establish valuation estimates as guidelines for discussion with investors)

Here are some common mistakes even self-styled experts have made that you want to avoid:

• Lack of objectivity. A company executive may be tempted to post an overly optimistic business forecast. Skittish investors who don’t have all of the information may be too pessimistic. You need balance.
• Forget about cash flow. It is tempting to look at the overall revenue minus expenditures and call it a day. But what happens when a company faces monthly bills and only manages to get paid by its customers every 3 to 6 months? Once the startup cash burns out, a problem with cash flow can put the kibosh on a business – which won’t do wonders for its valuation.
• Counting intangibles. Customer goodwill, great branding and a convenient location are already accounted for in the company’s sales (eg. When Apple sells an iPad, its sale is a result of its brand recognition and easy-to-find stores). So you don’t need to count these things twice.
• Comparing apples and oranges. “Industry average” revenues or expenditures may not apply to a single niche company touting an innovative business model or blockbuster product.

Try our easy-to-use valuation tool to develop guidelines for discussion with investors