The purpose here is to determine whether or not the business is valued at an amount that is not appropriate (most likely too high) for where the business is in its development. For this element one should look to see that the NPV of cash flow, market estimates, prior investment, and assets under control all can be synergized into a valuation that makes sense to the investors and is in line with the market rate for similar investments. How crucial is valuation to the success of a venture? More accurately how important is valuation to the success of an investment?
Paul Graham just published an insightful essay on Angel Investing, found here. There is a piece on valuations that I have included in this post because I think it’s a great description of how valuations of young companies are determined:
“There is no rational way to value an early stage startup. The valuation reflects nothing more than the strength of the company’s bargaining position. If they really want you, either because they desperately need money, or you’re someone who can help them a lot, they’ll let you invest at a low valuation. If they don’t need you, it will be higher. So guess. The startup may not have any more idea what the number should be than you do.”
How are you valuing companies? Go to www.venturephenomeproject.com and share your experiences with investors and entrepreneurs.