According to some experts, a startup founder is better focused on what is best for his business today, and starts from calculating how much funding he needs to get. Startup valuation should only be considered as a result of the nominal calculation of the required funding.
Here are some things you should consider in determining the target funding nominal:
• Estimating the time that must pass until a startup can get the next funding. For early stage startups, it usually ranges from 12-18 months.
• In that time span, you must be able to develop a number of important metrics (key metrics), such as the number of users and repeat transactions (repeat transactions).
• Calculates how much money will be spent in that time period. A startup will usually spend large funds in investing in employees and technology.
• Adjust so that the valuation value generated will not differ greatly from the valuation of other startups in Indonesia.
How to calculate Pre-Money valuations for early stage startups
To determine the Pre-Money valuation, there are actually two types of calculations, namely:
• Use methodologies, such as Discounted Cash Flow, Comparable, and Berkus, which will be explained below.
• Without methodology, or commonly referred to as Pricing. Founders only need to calculate the amount of funding they need and the shares they are willing to give, then negotiate with the investor.
In fact, for startups, most founders and investors in Indonesia more often use this Pricing technique to determine startup valuations.
This happened because a venture capital company (VC), which used to provide funding to startups, was eyeing profits from the resale of shares they owned. Therefore, they tend to estimate the right selling price for the startup in the future, when they want to provide funding.
This is different from conventional investors who usually provide funding to companies to benefit from profit sharing (dividends).
“Determining valuations for startups is more like art than science,” an investor from a venture capital company told Tech in Asia Indonesia. To provide a reference in determining reasonable prices, VCs will usually use existing valuation methods.
Differences in calculation of startup valuations in various phases
1. Initial Phase
• At this stage you can get seed funding from an incubator, angel investor, or venture capital company
• The majority of homeland VCs will usually use the Comparable, Multiple method, or determine valuation based on the startup development phase at this stage. Some of them use more than one method, then look for the average valuation resulting from these methods.
• Team quality is important at this stage. Therefore, founders who already have good backgrounds and experience have the potential to obtain greater funding and valuations.
• At this stage, startups will usually give about 10-15 percent of shares to investors. But there are also startups that after negotiations can only give 5-10 percent of shares, or even give shares above 15 percent.
• Some VCs also tend to choose convertible note options at this stage. Convertible bonds are debts that can be converted to ownership of shares within a certain period of time (usually when startup gets further funding).