Ambitious small, early-stage business owners looking at options for funding growth often ask "How much is our business worth?" or "How much equity should we sell?". There is no easy answer, and here is why.
There are all sorts of methods and formulae for valuing companies with a trading history, but it is much more difficult when you are looking at a pre-revenue enterprise, or a small business with a potentially great product, but no customers yet.
The logical first step is to look around the market and research other businesses of a similar size, sector and potential, how they have grown, scaled and exited, and how they were valued.
Benchmarking exercises can be useful, but no business is ever the same, and valuations vary wildly across sectors - just look at how some online platforms have been valued. Generally speaking, the earlier the stage of the company in its growth cycle, the harder it can be to value.
Having an honest conversation with founders at an early stage is essential. Our advice is often about trying to change their mindset away from ’giving away’ a stake in their business to ’selling’ a percentage in return for funding and/or additional expertise providing the foundations for the business to grow and scale far quicker. Different ideas as well as new equity can be a real gamechanger and can super charge the growth of a company
Advisers have an important role to play between the entrepreneur and the investor particularly if this is the first time they have looked to raise finance. It's almost a mentoring/coaching role, where you highlight that dealing with investors is a negotiation - it's a business deal at the end of the day- and you have to try and manage the personal emotions that can distract from closing a potentially good deal for all parties.
There needs to be understanding of the investors' position - investing in a start-up or early stage businesses is risky - it's a high risk asset class - and investee companies should expect rigorous questioning of their business plan and strategy.
Another important point in this area of raising finance is to be open-minded. For instance, we encourage our small business clients to get out, meet potential investors, and understand there are different types. Some will want to be really hands-on, while others will be prepared to take a back seat. Finding the right investor is key - you need to share the same goals and ambitions.
Four golden rules for fundraising:
- Be prepared to negotiate
- Have some evidence of how you have come to the valuation of your business
- Don't do it alone - take advice - and don't rush in
- Don't forget the day job - raising finance can be a lengthy and distracting process.
For more information please contact Gaynor Dykes.