You know, by virtue of my position at the Capital Match Point, I have the opportunity to talk to entrepreneurs on almost a daily basis. Entrepreneurs that are seeking capital and in various stages of finding it. And one topic that our conversation almost always gravitates towards is what is your company worth? And after we talk for a few minutes. the answer usually comes back as something vague or maybe just simply, "I don't know." And one thing that I can't stress enough is that you, the entrepreneur, regardless of what the investor is doing because they're going to form their own opinion of what your company's worth, but you, the entrepreneur who's seeking funding have a very fact based, analytical opinion of what your company's worth.
Now, valuation and middling is as much art as it is science, and everybody has their own way of doing it. This investor will think that something's important, and this investor will think something else is important. So, what I generally recommend is that you take at least three methods of valuation and look for convergence around a number. And chances are, if you get convergence around a number, you're on the right track. Now, whether you like that number or not, I don't know. But it means that you are on the right track. And again, there are a lot of different methods of doing valuation, but three that I would recommend, because they are widely used and all of our investors will understand them, is the price-to-earnings ratio, the price-to-sales ratio, and the discounted value price of the cash flows.
Now, the price-to-earnings ratio will require you to go out and do some research on publicly traded companies in your market space. Find out what kind of price-to-earnings ratio they're trading at compared to your company and what you think the appetite the market will have at your time of exit and make your valuation accordingly.
Price to sales is done very similarly, except that, instead of earning-- the price of your stocks to earnings, use the ratio of the price of your stock to sales. This method is used a lot in mature industries that don't yet have a clear path to profit but in industries that do have revenue. It's almost a surrogate way that the market uses to assign value to a company.
In the discounted cash flow method, what you need to do is make some projections about your company's cash flow out into the future. Five years if you can; three years minimum. Discount those cash flows back to the present, sum it together, and arrive at a value of your company.
Again, your opinion and the investor's opinion are going to be different. That's ok. But you need to be armed with something to negotiate with. Or, if you'd like some help in establishing a value of your company, get in touch with us at the Capital Match Point. We're here to help, and we're here to maximize our client's chances of getting funded.

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