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 -

  1. How difficult is barrier to entry for you? Are you competing with Uber in mobility or Swiggy in last mile delivery? Stay low.
  2. 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!
  3. Will it be too easy for your customers to switch to your competitors (Uber vs Ola; stay low), or too tough (Whatsapp; go high)?
  4. 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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