One of the hardest parts of raising early-stage seed capital for a startup is agreeing a value for the equity on offer. At Seedrs, we love idea stage companies, but we have learned a lot about how investors view new startups. Sorry everyone…I have some bad news. An idea on its own is not really worth that much. There are lots of other people with great ideas.
The real value in a business comes from how the idea is executed. While there may be loads of people with a similar idea to you, you have the opportunity to create a valuable business by executing the idea better. The problem is that for an idea stage business, seeking its first round of seed capital, it often hasn’t started to fully execute the idea enough to demonstrate value.
Valuation is a very tricky thing. Even valuing a company that is about to do an IPO, with years of accounts and revenue and other fancy statistics, is extremely difficult. Just look at what happened to Facebook! A company that hasn’t yet started earning revenue, has yet to sell any of its products, or has yet to even build the product prototype, is even harder to value.
So does that mean your idea stage business is worth only £100? Of course not. There is a tremendous amount of value in an entrepreneur who has identified a problem, who has come up with a unique solution to that problem, who has spent six- months researching how to implement the solution, has developed a strategy to implement the solution and who has sourced and brought on board a great team of people with the necessary skills to execute the idea. But is this worth £1,000,000? Probably not. Is it worth around £300,000? Maybe.
At the end of the day it is irrelevant what you or I think that your business is worth; what really matters is what the dozens or hundreds of potential investors think. And from their perspective they may see a great idea and a great team, but they also know that there is a long road ahead before that idea is executed in a valuable way…and your valuation has to reflect this.