What Founders need to know about Valuation?

I’ve often been asked this question by some Founders “Bro/Fareez/En.Fareez /Sir<—WHAT!!!, how do I valuate my Startup?” and my usual response would be “Entah/Dunno/Magic/Pick a Number”. This is because there are various formulas or methods out there to valuate a Startup, to which due to my poor arithmetic skill, I cannot comprende  (most times).

How does valuation work?

There is no harm learning or understanding the various formulas or methods to Valuate a Startup. However, Founders should first understand the fundamental concept of Valuation in an investment transaction (the What?) before mastering the method to valuate (the How?) :-

1)Truth be told, in an Investment transaction, Valuation is determined based on what the Founder(s) and Investor(s) ULTIMATELY agree.

WHAT! LIES! BLASPHEMY!                                                                                      *the sound  of shattered reality in the background* 😱

What it means is that the Valuation of a Startup can be as basic/simple as this:

Founders: So how much you do you want to Invest?

Investor: RM100k at RM1.0million valuation

Founders: Aiyooo…cannot lah like that – RM1.5 million valuation can?

Investor: Ok…ok can lah, cincai kira.

2) There you have it – the Startup is now valued at RM1.5million. This is because, if Parties cannot agree on a Valuation figure, the Investment Transaction will not take place.

What is the purpose of Valuation Formulas and Methods then?

Simple… to substantiate and support the Valuation figure you proposed. Consider this scenario :-

Founders: So how much you do you want to Invest?

Investor: RM100k at RM1.0million valuation

Founders: I disagree, I believe my Startup is at least worth RM1.5 million.

Investor: How did you arrive to that figure?

Founder: The movement of the constellation/Feng Shui Master told me/ Tok Bomoh say its my lucky number/ I saw it written on a fish in my dreams on the night the moon shine the brightest

Investor: 😑😑😑

What I’m trying to convey is that in an Investment Transaction, Investors would be more likely to agree with the figure you arrived at if it’s based on logical data, formula or method.

This is also why at the Pre-Seed or Seed round – Valuation is either postponed to a later round or done as follows:

Assuming, there are 3 founders with RM30k paid up capital (equally shared)

Investor: I give you RM250k

Founders: I give you 25% equity ownership

In the above scenario, your Startup is effectively being valued at RM750k pre-money valuation. (If you don’t know how I arrived at the RM750k pre-money valuation – please don’t be shy to ask Hint Hint —>🍦🍦)

Important Note – Don’t be afraid to counter propose on the Valuation proposed by the Investor

Warning – Please, please, please maintain a proper Capitalisation Table to see the actual dilution taking place.

 

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