Early Stage Valuation

This is a real toughie. How do you value a business in its early stage of development ? Unfortunately the answer is not what everyone might want to hear.

The accepted approaches to valuation, such as asset value, Discounted Cashflow, Comparable Analysis, Break Up Value, etc simply do not really apply. Generally because the risk associated with the early stage of the venture is so high that mature valuation tools provide little more than fodder for academic argument.

I have even heard one venture capitalist suggest that there should be a dollar amount entered for every engineer in a software firm, and the same amount substracted for each MBA graduate in the same firm..........

My personal recommendation is for hte budding entrepeneur to fund the investment themselves, along with family and friends, until it is at least a visible commercial proposition. By this I mean there is something more to show than scribbling on the back of a coaster. Beond htre 'angel round'.

At this stage the valuation argument takes on a little bit more relevance as the project has taken its first young steps towards success. To argue value I believe you should ensure that you have specific knowledge of the sucessful and failed businesses that are similar to yours. Particularly the later - as VCs will always research failures and bring these up with you. So be prepared.

At the end of the day the early stage valuation, in my experience, tends to be a justification styled process where a VC that really likes a business plan will be more flexible in approach to value than if they are only luke warm. And the level of interest can often be driven by previous successes or failures - so in preparation of the business model and the valuation argument consider trying to enlist the assistance of someone who has done it all before - and with whom the VCs will gain comfort.

Comfort = lower risk. Lower risk means you will be better placed to argue value.