Is Your Start Up Really Worth As Much As You Think?

What Is My Start Up Worth?

Unfortunately, not as much as you think!

There are hundreds of thousands of start ups throughout in the country every year competing for investor money. The best ones solve a big customer pain, have an experienced management team and a great plan for growth. But even with all those factors, it doesn’t mean your start up is worth anything to someone else.

In reality, a business is worth what anyone will pay for it at a particular point in time. Even though your start up is probably worth nothing, investors usually assign a pre-money valuation of around a million dollars to it. This is because if they take all of the ownership of the company, there is no incentive left for you as the founder to grow the company. Any value in addition to this first million needs to be built upon typically in terms of excellent management, how “hot the market segment is”, and the progress the company has made toward real paying customers.

Remember every investor will want a “step up” in their investment during each

Subsequent funding round. The angel investor typically wants a three times return. The venture capitalist wants a ten times return. If the company is priced too high now, then it will be difficult to attract future professional investment. This frequently happens when founders bring in family and friends at a high initial valuation. It is important to understand how each investor will perceive their risk and reward ratio. As elements of risk are eliminated, the value of the business always goes up. The first money raised (outside your friends and family) is always the most expensive. This money needs to be used wisely to eliminate elements of risk in the business.

Continue reading this article at Forbes.com!