Startup finances and valuations are difficult to master. Many founders and entrepreneurs don’t have a background in finance or private equity. Building reliable financial projections is crucial for preparing a pitch deck for investors, but entrepreneurs often need access to expertise — which can get expensive.
Founder Institute, the Bay Area pre-seed accelerator, hosted a virtual event where Mike Lingle, founder of financial projection platform Rocket Pro Forma, offered early-stage companies a chance to dig deep on their finance and valuation questions.
Founders representing a wide variety of startups — construction tech, crypto marketplaces, triathlon registration apps and field service SaaS platforms among them — joined the event to learn from Lingle and each other. Topics included financial projections, bootstrapping and assessing your company’s valuation.
Here are three takeaways from the session:
Valuations for Bootstrapped Startups
One entrepreneur asked about bootstrapping, the process of self-funding your startup without investment from venture capital or private equity firms. How are valuations and revenue models different when your business is keeping lean expenses without outside capital?
Predicting revenue becomes a much more difficult task when bootstrapping, according to Lingle. Scaling operations is more unpredictable because so much of your company’s budget will come from the revenue you earn along the way. Founders also have to be much more careful with their budgets, because there’s no pool of VC capital to dip into when funds get low.
These difficulties are balanced out by the ability to maintain your equity stake in your company.
Finding the Right Valuation
Approaching investors with a startup valuation is a daunting task. You want to present a realistic number at your next pitch meeting, while also not selling your company short.
Creating a valuation involves calculating a cost for the sale of the entire company, even if most deals only involve part of the company. How do you value your whole company when you’ll still be running it after selling off a piece? How does the injection of capital change your valuation once you’re able to scale and accelerate operations?
The key to startup valuations lies in maintaining sound, detailed financial statements that help tell the story of your company while reasonably predicting growth.
Pre-Revenue Startup Valuations
Some startups — especially those in markets with larger overhead — need fundraising dollars before they even generate revenue. Founders in this situation need to find comparisons in the private equity space or look at trade journals for news of mergers and acquisitions in their space.
Having access to market research tools and investor data is essential in assessing your valuation. While every company’s situation is different, investors will appreciate founders that do their research and base their decisions on historical data.