How do yo maximize the value of your startup? In order to maximize the value of your startup, you need to understand how startups are valued. In this article, we explain you how startups are valued and how you as a CEO can maximize the value of your startup.
Understand how startups are valued
One of the most important things to understand when you are creating a fundraising strategy is to understand how startups commonly are valued. You might think that the value of your startup has increased since you have been putting so much work into it. Unfortunately, this is not the way it works. Startup valuations are based on calculations of risks and rewards. The value of a startup rises as risks are being reduced. So milestones like hiring a strong team member or monetization strategy proved to work are contributing to risk reduction and automatically increases the value of your startup.
Customer traction = most important milestone
The most important milestone in reducing risks and creating value is customer traction. When you have evidence of increasing traction of paying customers, you could show that risk is being reduced. It shows that you have reached a product - market fit and your team has shown the ability to execute.
Identify the risks
What is the execution risk of your startup? This varies greatly from startup to startup. If you develop a technological solution, the major risk is if the technology will be working.
If you have a great execution track record, but no experience in developing software and your startup requires software, you would be more likely to get funded when you attract a techical co-founder to minimize the risks.
Other risks include the following:
Team: unproven team. Not clear if they can execute.
Competitive: crowded marketplace with significant competitors
Market timing: you’re confident about the long term market prospects, but it is not clear when the market will take off.
Now that you have identified the risks of your startup, it is important to mitigate the risks as much as possible. Below, we have listed ways how to minimize the risks and maximize the value of your startup.
You could show how many potential customers there are. Show that you have been talking with prospects and that you know what the market wants and how much they want to pay.
If you have a large amount of free users of your service or product with high engagement, this is also contributing to the valuation of your startup.
In case you have already sold your product to a small amount of paying customers, it is important to show this.
Returning customers are also a milestone.
Other milestones and risk reductions you could think of are repeatable and scalable sales models. When you have tested your product for the product- market fit and you have increasing customer traction, it shows that you are capable of attracting customers. If you have found a sales model that is scalable and repeatable, it will increase your valuation greatly. This means that your company is ready to grow.
Anything that proves that your startup is scalable and that it fits the market, is a milestone and will contribute to risk reduction. Put this in mind when you are working on maximizing the value of your startup.
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