As we stated above, a big part of evaluations is knowing what your predicted growth will even be. For example, an AI startup with proprietary software that boasts it can accurately predict shopping patterns (but is untested on the market) might receive an evaluation between $2 million to $5 million. Almost every company conducting its first round of investment is in what’s called their ‘Seed’ round, which is a common term for when startups raise from friends, family, and angel investors. Rounds after that include Series A, Series B, and so on and so forth, with each round gauging a new level of evaluation; for example, Series A companies are usually considered to have a product-market fit, so they’re estimated to be worth around $10 million.
The simplest way to think of evaluations is the process of putting a price tag on a company. That is, if you were to buy this company today, what do you think would be a fair price to buy it? This is a big reason why we have these standards like Series A, B, C, etc because it helps investors understand the size and growth of the company, as well as the types of capital firms that have put money in (when you get later in the alphabet, more banks like JP Morgan might have a stake). As for you, however, a reasonable evaluation should boil down to where you fit in a seed round.
Most seed rounds are really just about getting enough capital to create a product-market fit. So, if your startup is a brewery that has a world-renown brewer, the fundraise would most likely cover the cost of labor, equipment, licensing, branding, etc…or, the typical costs of starting a business. Anything too high over that and investors might be spooked by your financial acumen, while aiming too low might put you in a deal that doesn’t deliver enough runway (the amount of time before your cash runs out). Remember, investment isn’t just ‘free money’ but rather someone buying a chunk of your business…something you worked hard to develop; don’t sell that piece for anything less than what you might think it’s worth, because investors are going to practically serve as your boss as well.
Once you’ve established where your evaluation is, an accountant can help quite a bit with putting the numbers on paper. Even if you’re thinking a bunch of charts and graphs will show off that you really know your stuff, putting your data into easy, digestible terms will exemplify you know how to communicate and articulate your whole plan. Business is a numbers game, and as long as you can speak the language, you’ll find yourself providing a foundation built off an honest value that can be built from the ground up.