A Founder’s Guide to Valuing a Startup Idea
When an entrepreneur wants to start their own business, they need to come up with an idea to grow with. It is the first step of starting a business. While a startup idea is not enough for a business to make it big, there is value in the startup idea itself. An entrepreneur needs to secure funding in order to carry out various operational functions to develop the product or service, market it, and generate revenue. However, why would investors provide your business funding? This is where valuing a startup idea comes into play. The value of a startup idea may be measured by how easily it can be converted into (more) cash.
If you value a startup idea, it piles up in startup valuation when measuring its potential. In this article, we will discuss how to evaluate startup ideas and value a startup with no revenue.
What is a startup idea?
A business or startup idea is thought to create a product or provide services in exchange for generating capital. The first step in creating a successful business is coming up with a startup idea. While the startup idea is not enough to penetrate the market and gain a competitive edge, it can lead the business to the next stage. After coming up with an idea, the entrepreneur still needs to determine a business model for the startup. Some of the qualities of a good startup idea are the following:
- It is innovative in nature
- Address a problem to solve
- The concept should be able to generate profit
- The idea should make sense
- Should be unique
How do startups work at the idea stage?
In the idea stage, entrepreneurs attempt to come up with the right idea they would pursue to become successful. This is a very delicate situation since the founders’ future course is decided at this point. To assist entrepreneurs at this stage, the startup ecosystem has various incubators established up to push the growth of startups.
During the idea stage of the startup, entrepreneurs aim to find a problem-solution fit and create a minimum viable product (MVP). They need to test, modify, and release the MVP to the target market. It is important for entrepreneurs to balance their focus on the product and consumer needs to build a product that succeeds in the future. The idea stage looks different for tech companies and non-tech startups. Let’s look at them separately–
- Tech startups – During the idea stage, tech startups need to consider ways of getting funding from angels and venture capitalists. Entrepreneurs must establish a scalable firm that delivers high profits (usually 10x or more). Most ideas emerge from a founder’s history, training, and passions. To grow, the concept must be fresh, unique, and solve a huge need in a large market that makes a difference of typically more than $1B. In addition, they must also have strong gross margins.
- Non-tech startups – Non-tech small enterprises are less likely to grow and acquire VC funding. Smaller startups must generate positive working capital to qualify for bank borrowing. Since their success relies on the local economy, they need to examine local demand and competition. Entrepreneurs must come up with an idea that fits the market gap and gives them a strategic advantage.
Why is it important to value a startup idea?
In order to get funds from VCs or angels, entrepreneurs must promise a return on investment (ROI). Therefore, in order to convince them, value startup idea to show this promise of potential to provide a good ROI. This value can be generated through thorough market research, a business strategy, and the resources available.
For example, a business is developing a specific product that is in greatly demanded in the local market. They need a piece of land worth $X to set up a manufacturing unit. Based on their business strategy, their sales of the product can produce $5X in a year. They can show the investors the value of the startup idea on such terms and secure the funding to purchase the land with a promise to double their investment in a year.
How to evaluate a startup idea?
To value a startup idea, there are many considerations to keep in mind and different methods to choose from. Let’s understand these factors and methods in detail below.
Important Factors to consider while evaluating a startup idea
When you value startup idea, keep the following factors in mind:
- Problems at the idea stage – Identifying and dealing with the problem that could cause the startup failure can make a magnanimous difference in increasing the value of your idea. As they assess your new firm for financing, VCs and Angels will also be paying close attention to the problem underlying your Product. Your problem should have two or of the following characteristics to be a value-adding problem:
- Needs to be solved urgently.
- Faced by Many
- Eventually increasing
- Necessary to solve
- Costs a lot of money
- Happens often
- Audience/customer segment – Identify the target customers that your product is for. Do not include everyone here, but just the people who will definitely be attracted to your business idea. These people will get your product at an early stage to test the market and provide feedback to improve and modify it.
- The solution to the problems – Here you need to carry out an exercise to clearly put down the problem that your startup will solve and explain how it solves it. This is a theory that can only be investigated at this point by developing an MVP and distributing it to people.
- Your competitors – When angels and venture capitalists assess a startup business for investment, they contrast it with already available alternatives to see if it has a greater potential for growth. To be able to one-up your competitors, it is important to know who they are, what they offer, their strengths, and their weaknesses. This will help you understand if your startup idea has a chance standing against them.
- UVP and USP – UVP and USP are two main ways of defining the value of your startup idea. It’s the quickest approach to demonstrate your worth to consumers. The UVP is what buyers obtain from utilizing your goods. It emphasizes audience advantages in an emotive, narrative style. USP outlines how your product or service differs from rivals. It’s related to your UVP but more specialized. The USP refers to distinct advantages you give that your rivals don’t.
- Unfair advantages – Investors must be able to perceive that your Startup can expand quickly, regardless of how much of an effect your product will have on mankind or what your personal characteristics are. Prepare your Competitive Advantages, a unique set of qualities that can help your Startup expand quickly. These can be any of the following:
- Something that sets you apart
- Strong Market
- Unmatched capabilities of your product
- Great acquisition possibilities
- Possibility to establish as a monopoly
- Channels to grow – Startup teams must develop quickly; that only happens if your user base expands. Your company idea’s worth improves when you have a strategy to locate your first few consumers, then the next hundreds, and then a way to reach your entire audience. This basically depends on your marketing strategy and a clear idea about it.
- Revenue and cost – This portion is basically the numbers as we discussed in an example earlier. Two important questions you need an answer for are- how much will your customers pay and how much will you pay to keep the business up and running? You should have a list of costs and expenses that you expect to pay in running the startup.
How to evaluate a startup at the idea stage?
Startup valuation is a process that allows calculating the worth of a business that has no revenue so far. At the idea stage, it gives the investor a picture of the potential of the startup idea. A consistent cash flow and financial records help evaluate mature businesses with ease. However, without income, it’s difficult to value a startup in the ideal stage. That is why, to value startup ideas, is the first step of pre-revenue startup valuation.
Tips you should consider to value a startup idea
It is best to find the value of your idea in order to know the worth of your business and increase your changes in securing funding with investor. Ready to value startup idea? Here are some tips for you:
- Prepare a compelling business plan – Write down your business idea with details about your consumer base, business model (partnership, location, etc.), and founder details. It’s time to examine the statistics. Your business plan’s goal is to help you through this process, pushing you to explore and create a better understanding and analyze the dangers before diving in. Before starting your firm, consider how much money you want to earn through the venture and how much business you’ll need to generate a profit.
- Evaluate market demand – Launching a product or service before testing the market might lead to disappointment. Your concept may be fresh, but there’s probably already something similar. Even brilliant company concepts depend on market demand. Is there a space for you? Ask yourself, will the business address clients’ problems? How are individuals handling this issue before your product/service? Is there something similar like your idea? How will my firm be distinct from others?
- Research your competitors – Whatever your business ideas, you’ll always have competitors. Find direct competitors who provide the exact same product or service. Include indirect competitors who supply similar goods and services. Once you know the competition, determine if clients will select your business over the others and the why and how behind it.
- Research your customers/audience – After seeing a market need for your new firm, get to know your customers. Determine who your customers are and their needs and goals. Know their age, locality, gender, etc. This information will be crucial when you decide to market your products.
- Ask for feedback – Once you have a clear business idea, get feedback from your friends, family, and colleagues. You can also leverage social media to get and monitor feedback.
Have Eqvista evaluate your startup idea!
To value startup ideas, fledgling businesses need to get a startup valuation. Eqvista is a team of expert accountants, attorneys, valuation specialists, and business owners dedicated to assisting companies in getting a thorough valuation. Whether your business is in the pre-revenue stage or needs a complete corporate valuation, our highly qualified valuation professionals at Eqvista can help! We include everything from the startup idea to the administration of shares. Contact us to find out more about our valuation services.