This might sound complicated, but it comes down to some basic fundamentals you need to scope out as soon as possible. Many of these involve inside and outside factors in your company's health. Most importantly, you need transparency and not try to hide financial realities.
Offering Your Executive Summary, Business Plan, and Tax Breaks
In scenarios where you need to prove your valuation directly to an investor, take some time to put together and present an executive summary and a solid pitch deck. Doing this gives a quick overview of how well you're doing, your value proposition, your team and future goals.
Your detailed business plan should also show your financials, such as your profits and loss, your cash flow projections and balance sheet. You may want to consider metrics such as customer acquisition cost (CAC), lifetime customer value (LCV), and monthly recurring revenue (MRR) to demonstrate your growth, if you're a SaaS company.
Don't forget about using EIS and SEIS tax breaks, something that is very attractive to investors since it also saves them tax.
Anticipating Future Earnings
You need to build a great financial model to anticipate the return on investment for investors. Investors will measure this from EBIDTA (Earnings before interest depreciation tax and amortisation) so it isn't just about having projections that present strong revenue growth.
But how do you convert all these parameters to the future to calculate the value of the company today? One of the major methods to be used is called Discounted Cash Flow (DCF). As every valuation method based on the future, DCF values are dependent on the accuracy of forecasts. For early stage companies, with zero or no track record, these forecasts are usually far from accurate but it will show your earnings generally change from year to year and it transforms future cash-flows in their equivalent value today.
If you're a startup founder looking for a do it yourself template we recommend Foresight.is.
Comparing Selling Price Based on Similar Companies
An investor may prefer to compare your company value based on similar tech companies. If you have a high-growth startup, accountants and lawyers are among the best advisers to help you determine the market rate for comparable companies at your stage. A lot of this can vary depending on geographic location, what kind of revenue you have, the type of consumer you target (B2B/B2C) , how many employees work for you etc.
These comparisons determine fair market value and prove you have viability in a crowded startup marketplace.
Miscellaneous Things Determining Valuation
As Entrepreneur reminds, you have to prove profitability to determine liquidity. Maybe you'll be worth billions once you're profitable, but what you're worth now is perhaps only a fraction.
Nevertheless, other factors can determine your value. Things like customer relationships, industry life cycle, employee skills, and product innovation can determine your future worth. Provide proof of all these to your investors with thorough metrics to back up all your points.