With rising mergers and acquisitions in the startup market, a sudden interest in one’s business by a suitor could send anxiety in their system as they try to find how much to sell a business.
Many entrepreneurs simply do not know how to value their businesses and could have a hard time quoting prices.
Supply and demand
In the case when demand is coming only from one buyer, the price of your company is what the buyer thinks it is worth unless you can convince them otherwise.
The other determinant of valuation is basically supply, how many other startups are there with the same business as yours. The higher the supply the less a venture capitalist be willing to pour in.
If there is an increase in M&A activities in the area, then one could easily compare prices of recent acquisitions and get a reasonable deal. A short supply of venture capitalist or a wait a see attitude from buyers may send prices to earth if entrepreneurs are willing to sell.
The kind of industry one operates in also determines the price one can quote to the interested buyer, a startup in biomed cannot be priced as a startup in media or drones.
This differences are also brought about by the expected future cashflows the business will generate all other factors held constant.
The stage at which the business is will also determine its price, a new business with little to no revenue may be valued at a lesser price than one that has started generating cashflow or revenue.
One of the most common ways of valuing startups is the revenue multiplied by a factor such as 10 years or 25 years depending on the industry.
Others are asset based valuations, if the company has significant assets that generate earnings, then the valuation of the assets may be used.
However there is not definite way of measuring startups, companies that have done acquisitions in the past may just look at your business and price it in multiples of their last deal.
Jesper Hornberg, serial entrepreneur, investor and fund manager will be sharing a unique perspective to company valuation: how does an investor look at a company and what is it she/he finds important? & When are you investment ready? at the Hub East Africa in Nairobi on Feb sixth.