How to do your startup valuation for free?

Question

Being bootstrapped is not a very nice feeling because we have a strict limitation on the budget. You know the market you are capturing is great, the idea is fantastic but you have no money. 
In this situation if you have to raise funds, you better have you valuation done.

I tried connecting to few people on it, but the charges are unaffordable for us.

Can anyone help me, in letting me know, if there is an alternative for this? How can we evaluate our start up(for free/nominal fee)?

Matthew Johnson · Accepted Answer

Generally the valuation is set by a lead investors. I'm not sure most investors would rely on a third party evaluation that you paid for to set the terms of the round. That's something that would come out of the negotiations between you and the investor.

Additionally, if this is your first round you can raise on a SAFE or convertible note so there is no need to set a strict valuation.

Tarek Dajani · Answer

Hi Kanan, I am actually creating a website where you can perform your valuation for a nominal fee, but it is not yet launched unfortunately (https://www.frontfigure.com/). Since that this is the case, let me help you out on how to atleast have a high level valuation. First thing you need to do is have a financial model (excel or g-sheet will do just fine), where you have to forecast your revenue and expense for the next 24 months minimum, the difference is basically your cash burn (not precisely but almost) (given that you are trying secure funding for the next 24 months, if less, I would recommend that you secure atleast 18 months of funding), second you need to research the revenue multiple of your sector in the startup space as well as research the valuation of your peers (comparable companies in the same sector in the same country or region) when they were in the same stage as you (example, seed round or Series A), and then multiply the forecasted revenue of your next twelve months with the revenue multiple you found. That figure along with the the average valuation of your peers should be the range of your fair value valuation. I am stating fair value here, because the actual valuation agreed upon afterwards does not necessarily equal the fair value calculated and should differ based on negotiations. If you have any questions let me know, good luck.

Tasos Valtinos · Answer

@tdajani Quick question. How do you conduct accurate financial forecasting when you have 0 financial data? I.e no revenue at all. And the only traction is users, content etc

Kanan Tandi · Answer

@mattcrail Thanks a bunch. Yes, I have been reading about SAFE for a couple of weeks and was thinking of giving it a try. Definitely connecting to someone who has raised funds based on this. Thank you once again for your time and attention.

Tasos Valtinos · Answer

@tdajani @dkaravias 100% agreed!

Tarek Dajani · Answer

@tasos_valtinos At this stage, its very difficult to have accurate forecasts to be honest, forecasts are something that become more accurate with time and with the maturity of your company, but atleast you can always try to put something together based on a worst case scenario at the stage you're at, so forecast your worst case scenario revenue (should be the lowest figure you believe it could be) and for the expenses put all the expense you can think of, and the highest number you think it could reach month on month or year on year. You do have some users now, Im guessing non paying, so accordingly you should have a preliminary figure to start with in terms of volume. Try to be atleast a bit detailed so for revenue calculate it by volume (i.e. users) * monthly price, salaries should be monthly salary for each employee or average monthly salary * employee, write down all your monthly fixed expenses, and variable expenses should be linked to revenue, but make sure they are actually a variable. For example, salary, rent, utilities, monthly membership of whatever service is not a variable. Good luck.

Tarek Dajani · Answer

@tasos_valtinos Hi Tasos, it is the norm for startups to be negative per month, unless your running on a really really tight budget, but that is not always the case. So let's say you are targeting to fund your operations for the next 18 months, the accumulated forecasted negative figure for the next 18 months would be your cash burn, but again not precisely, if you need something more accurate, you should also take into consideration the time you will be collecting your receivables and paying off your expenses (its called working capital), so for example, if your users pay a one time fee and use your service for 3 months or you pay an amount in advance to use x service for 3 months, the timing of this payment / receivables should be taken into consideration.

Kanan Tandi · Answer

@tdajani Thank you so much. That was very much detailed and easy to understand. Would let you know in case of any other doubt related to this. Appreciate your time and input.

Tasos Valtinos · Answer

@tdajani Wow, that was a very useful answer man! Thanks a lot for sharing. Will help to structure a draft forecasting document. Btw - looks like you have a lot of experience, feel free to join us: https://mapped.rocks . Dont wanna do self promotion here but looks like you know your way around startups. Also, feel free to check this out, Im sure you will love it: https://mapped.rocks/@chatrooms

Tasos Valtinos · Answer

@tdajani Ok that makes sense. But what if the forecast is negative per month? Or this is the goal actually in order to justify the reason for investment need?

Tarek Dajani · Answer

@kanan_tandi Sure, I'm available if you need any more help.

Tarek Dajani · Answer

@chatrooms @tasos_valtinos Thanks Tasos, sure will check it out today.

Tarek Dajani · Answer

@tasos_valtinos @dkaravias That is partially true, but they do always need a forecast to understand the growth you are targeting and you'll need it yourself to understand your cash burn, but again, early traction, market and team does matter, that is why fair value and actual value of a company are almost always different.

How to do your startup valuation for free?

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