Company Valuation.
What is a company valuation, and why is it important to know?
A company valuation can simply be defined as a way of measuring and quantifying the value of a startup company, from its assets, pro forma projections, etc.
This information is key for investors when looking into your company and can often be a deciding factor when it comes to receiving investment funds. Since this does measure your company's value, it is a useful way for investors to understand the value of their investment and percentage of equity that they may receive, along with the size of investment they may give. It essentially is a necessary step for scaling your business, it still is possible to receive funds without a valuation, but convincing investors to give you money will be scientifically harder, as there is much more risk involved for them.
For startup companies especially, these valuations can be complicated given that you may not have much to work with in terms of assets and monetary value to the company. It is important to keep in mind that in this process, it is better to undersell your company versus overselling. It’s much better to shatter an investor's expectations with their ROI than to barely meet any sort of capital gain, because you overshot the value and capability of the company at an early stage.
Valuing a company during a recession is more tricky. During a recession, companies may witness a sudden dip in revenue, EBITDA, cash flow, etc. Due to said reductions, key valuation metrics (i.e., EBITDA multiples) may be underestimated, impacting the calculated enterprise value. However, once the recession settles, your company may expect financial recovery with varying degrees of probability, which should be made known to the valuator. On the other hand, investors often view recession-caused uncertainties as risks; therefore, the valuation of your company could fall on their end.
Check out our Chairman, Richard Anderson III in this VIDEO, where he breaks down how we give a startup a valuation and what we look at when quantifying the value of a company.