The value of your company is based on the future cash flows of your business and the timing and riskiness of such cash flows. As it is difficult to come up with reliable estimates of future cash flows and risks, investors tend to look into past performance, and the current strengths and weaknesses of your company and market. That is, your valuation should be based on your accomplishments, your ability to reach your milestones and the potential of your market.
The most straight-forward methods to come up with a reasonable valuation are:
• Comparable companies. You can use valuations of businesses with a potential, riskiness and track record similar to yours as a starting point. Ideally, you should use some businesses that are very similar to your business in terms of stage, product, team and market. In practice, you will not find the ideal comparable business and will most likely have to use businesses that are somewhat similar to yours. You can then adjust for factors where you are different. You can use sources such as crowdfunding platforms, CB Insights, news papers and other media, accelerators and business angels.
• Multiples. If your business generates revenue or profit, you can use data from a comparable company to estimate the value of your company. Let’s say that a comparable company is valued at MSEK 10 and has a revenue of MSEK 1, and your revenue is 0.5 MSEK. The estimated value of your business is MSEK 5 (10/1 * 0.5).
• Professional input. You can talk about your business and valuation with business angels, venture capitalists and accelerators to get an indication of the value of your business.
• Bizequity (free) and Equidam (affordable) are online services for valuating early-stage companies. They estimate the value of businesses based on a combination of various valuation methods. You provide information about your business in accordance with their forms and get an estimated valuation in real-time.
No method is perfect and we strongly recommend that you combine some or all of these methods to come up with a reasonable valuation of your business. If your valuation is too high, you will most likely not be able to raise the capital you need. Even if you succeed to raise the capital, you will put yourself in a difficult situation in the future. If your current valuation is too high and you do not meet the targets motivating your valuation, future investors may demand a lower valuation while your current investors may argue for a higher valuation. In short, it will become more difficult to raise additional funding in the future.
In the fundraising process, we ask you to set one minimum and one maximum target for your fundraising round. If you do not reach your minimum target, all investments in your company through the platform will be cancelled. Your maximum fundraising target cannot be more than twice as high as your minimum fundraising target. The reason is that a too wide spread between the targets may make investors question how much money you actually need.
We will also ask you to provide information on how your funding will be used if your reach your minimum or maximum fundraising target. Your minimum target should be based on how much money you will need to reach a certain milestone such as prototype, patent, product or service launch or a certain number of customers. As estimates about early-stage companies tend to be very uncertain, we recommend you to leave some room for unexpected circumstances. If you have to raise additional funding before you have reached your milestone, your valuation will most likely be lower. You will also need to survive some time after you have reached your milestone since it takes some time to raise funding.
In addition, you have to make sure that your target is achievable. If you have secured some investments before your offering is launched on the platform and if you already have a proof of concept or generate revenue, you are much more likely to reach an ambitious funding target.
If your business is very early-stage, you should be careful not to ask for too much funding. Investors may want to see some track record before they are confident to invest more. Furthermore, you may have to give away too much equity if you raise large amounts of funds early on at a low valuation.
In the fundraising process, we ask you to provide financial projections for at least three years including income statement, balance sheet and cash flow statement. The statements shall be prepared in accordance with Swedish GAAP which among other things mean that any projected intangible assets shall meet the criteria for an intangible asset. Your assumptions shall be clearly defined and linked to your plans. If you for instance write that you will hire 10 employees or that you will start generating revenue at a certain date, it should be reflected in your financial projection. It is also important that your financial statements are coherent with each other. For example, your projected profit or loss shall be reflected in the income statement and the balance sheet. If you do not already have a model that meet our criteria, contact us and we will send you a model which is easy to use.
Once you have the model, you will have to make assumptions and estimates about your future performance and financial position. Ideally, your estimates should be based on your plans, data from comparable companies and actual prices from your current and future suppliers. The key estimates for your financial projections are:
• Revenue based on estimates on price per unit and number of units sold. Your prices should be based on the prices of competitors and your number of units should be based on the sales of comparable companies and your marketing strategy.
• Direct expenses based on numbers of units sold and the cost per unit. Use data from comparable companies and competitors to project your expense items and use prices from actual and future supplier project their future pricing.
• Other external expenses based on prices from actual and future suppliers. The expense items should be based on your sourcing strategy and business needs. If you for instance operate in a regulated market or plan to seek patent but do not plan to hire competence in these fields, you should project fees from consultants. You should also include expenses for sales, marketing and other indirect expenses.
• Salaries based on planned recruitments and market salaries for the respective positions. Your projected staffing should be based on your strategy and business model. You can also use data from comparable companies and competitors to learn what positions and competencies you will need. We suggest that you ask companies with similar staffing, professional investors, other business connections and personal connections to learn about the market salaries for the positions you plan to fill.
• New loans and new issues of shares based on your need for external financing. If you project steady cash flows in the near future, you may want to borrow money whereas you should issue new shares if you project that you will have uncertain cash flows or long time to market.
• New assets based on your need to purchase or develop assets such as patents and machinery to run your business. Estimates on assets should be based on the needs and plans of your business.
Other assumptions are:
• Future tax rates available on the website of the Tax Agency.
• Interest on future loans based on the terms and interest rates on current loans and expected interest rates in the future.
• Working capital based on your need for inventory, credit on trade receivables and trade payables (normally 30 days).
If you need any help with your financial projections, please contact us and we will be happy to help out.