I realised that I had discussed company valuations several times, but had not explored or discussed the most common mistake that many startups make, the cliched “My startup is worth £1M”
Here are a few compelling reasons why you’re not:
1. As mentioned in a previous blog, if your startup really is worth £1M, why not sell it, buy yourself a nice apartment, give yourself a decent income for a few years and self fund your second equally valuable startup also coincidentally worth £1M.
Oh, and if your answer is “Nobody will buy my company for £1M at this stage”, then you’ve just answered why your company isn’t worth £1M yourself.
2. The average salary in the UK is £25K per annum and a person works for around 40 years on average. This means the average hard working Brit earns £1M (gross) during their entire working life. Are you telling me that the project you’ve spent six months working on has the same weight and merit as the total output of your colleagues entire working life? I didn’t think so…
3. At £1M valuation, most investors would consider your company mature and experienced. Thus you should have a finished product that is selling and making profit. You should understand accounts and business practice, you should understand HR and employment law. But most important, you should have filed audited accounts, working management accounts a cohesive 5 year business plan with comprehensive and realistic projections and figures.
You should know exactly how you are going to spend the investment you are after, what you will achieve for the business both intangibly and on the bottom line, and you should give a obligated return on investment and timeline to your prospective investors.
With that obligation comes pressure, making a mistake or showing a lack of understanding of any of this is not an option for a £1M company. Also the expectation from investors is much higher and the pressure exerted to achieve a good mid term ROI heightened.
If you fail to hit your promised numbers, investors will seek to take restitution and exert all the pressure they can to bring you to account. Do you really want all that pressure, or do you just want some operating capital so you can see what potential your business has?
Most startups only want money to enable them to forget about financial concerns in the short term and concentrate on building their product and customer base. If that is your requirement, you should look to value your startup up to a maximum of £500K, but more typically £250K.
Asking for and getting an investment based on a £1M+ valuation could be the most oppressive and inhibiting act of your entire working life. You have enough stress already, so don’t push the boundary for investment. Get enough money to work with but not so much you don’t take on a gaggle of vigilant and aggressive investors.