Despite what the excitable tech press might tell you, wild valuations for startups are far from the norm. In the latest episode of Angel Insights, featuring veteran investor and startup mentor Marty Zwilling, we reveal that valuations have been relatively consistent over a number of years. Indeed pre-money valuations average at $2.5m, rather than the $10m figure that has long been suggested.
Ultimately, startup valuations are extremely unpredictable. They are determined by the internal dynamics described here, but they are also heavily influenced by external macro forces.
Perhaps though, the central questions is ‘how should a startup be valued?’ In our exclusive interview with Marty Zwilling, he clearly identifies the three cornerstones of an accurate startup valuation.
Are they experienced entrepreneurs? Have they worked at ‘titan’ tech companies? Are they fresh out of college? Do they have technical expertise? All of these and many more will have a significant impact on the valuation of a startup. As Zwilling explains in the podcast, certain VCs will only hold meetings with seasoned entrepreneurs, therefore the price of a startup spearheaded by an experienced team will undoubtedly be higher.
2) Intellectual Property Rights
Many startups today will lack IP, trusting that superior branding and being first to market will be sufficient to build a valuable market presence. Nonetheless, securing IP will substantially increase the value of a business as it protects its position, ensuring that no competitor can enter the market with the same concept. This can be a major difficulty for startups with strong ideas but may simply be outmuscled by larger incumbents making a later entry into a market.
This is a contentious topic as it is often the case that very early stage startups have zero, or very little revenue. However, if there are no revenues or if a business is forsaking profit in order to invest for growth, then revenue multiples can be used to determine an approximate valuation. Early stage tech companies with the capacity for high growth can enjoy revenue multiples as high as 2x-5x, even going as high as 8x-9x for seriously exciting prospects.
Ultimately, startup valuations are extremely unpredictable. They are determined by the internal dynamics described here, but they are also heavily influenced by external macro forces, for example consumer supply and demand for a product, investor supply and demand, as well as investor expertise, the availability of alternative financing methods and much more. When working to establish a realistic startup valuation it will pay to take an external view of both the macro and micro environments, and if all else fails, negotiate!