Early stage valuations and competitive advantage
Founders of early stage startups are often anxious about how much their company should be valued at. If your product is pre-MVP and pre-revenue, you can't quantify your cash flows. Consequently, you can't Discount your Cash Flows to a "Oh, that's a cool number!"
I ask you four questions before you come to a number -
Ultimately, it's unlikely you'll see eye to eye with investors on valuations. But particularly sans cash flows, *any number that you can defend with conviction until you get a term sheet, is a good number!*
I ask you four questions before you come to a number -
- How difficult is barrier to entry for you? Are you competing with Uber in mobility or Swiggy in last mile delivery? Stay low.
- How big is your competitive advantage? Can you continue to grow at 20% YOY for 15 years? That's 10 years to IPO and another 5 for economies of scale to kick in. Do you have patents? Do you have an intrinsic advantage over your competitors to keep your costs low? If yes, go high!
- Will it be too easy for your customers to switch to your competitors (Uber vs Ola; stay low), or too tough (Whatsapp; go high)?
- How matured is the market? Are you positioned for a stable share in a growing market (say gig economy, go high). Or, are you competing for a growing share in a shrinking market (say BPO, stay low)?
Ultimately, it's unlikely you'll see eye to eye with investors on valuations. But particularly sans cash flows, *any number that you can defend with conviction until you get a term sheet, is a good number!*
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