The truth is that for many entrepreneurs valuing your company is one part industry analysis, two parts assessing your traction to date and ten parts finger-in-the-air guessing or back of a beer mat maths. But there are ways to get help – here’s how we did it.
Our companies are our babies. We tend to them every day, helping them to grow, even when they are screaming and throwing tantrums (think of your website bugging out!). Like new parents reacting to heat rash, young entrepreneurs panic when it comes to valuing their companies. New entrepreneurs, like first-time parents, need to relax a little and take heed of those who have more experience.
In Spring of this year, we were at the point where our business, Tutora, was doing well. An online marketplace helping students and parents to find and book tutors, we had gained some real traction, with a high number of tutors, a good-looking hockey stick sales graphs and a route map for expansion. To make that growth a reality, however, we needed to raise investment.
The problem was that we were novices at raising investment, and had no idea how to determine a valuation, or, resultantly, how much equity we should part with. We didn’t even know which route to take to raise the funds (see this article for more advice on this). But we got there and there are some key lessons we learnt which we’d like to share.
Most importantly, you must remember that a company isn’t worth an exact amount – it’s simply supply and demand. It’s all too easy to forget this when you first sit down to value your businesses, but be calm and think methodically.
Your first step will be to work out what you are supplying, and improve it. I don’t mean, improve your product or service (of course, don’t not do this!) but instead, improve your company. Your company is your business plan, your pitch, your accounting, your staff, and yourselves. Of course, investors are looking for companies with great products or innovative services, but they’re also looking for everything that surrounds this.
Does your business plan read well and is it well produced? Does your brand flow through everything you do and does the ethos of your team match this? Can you talk confidently about your business and present a slick pitch? These are characteristics which are part of your business, and will, therefore, be inherent in the valuation.
Think of it this way: if you were to value two businesses with the exact same product and traction to date, but one had founders who struggled to pitch and the other had suave confident presenters, do you believe they would achieve the same valuation?
Some may argue that an investor could bring more to the first business, but, in truth, they are highly unlikely to be able to raise as much capital as the second set of founders. Investors are looking at the whole package. So, before you even begin on your investment-seeking journey, get everything in place that signals a professional, well-run and thought through business.
In doing this, think about the story you are going to tell. Everyone likes a good story. Here’s ours:
Whilst working as a primary school teacher, I was asked by lots of parents to recommend tutors but I didn’t know where to look and parents were often left at a loss. I ended up tutoring some of the children myself and left teaching to become a full-time tutor.
After receiving more inquiries than I could handle, I spoke to Mark, a school friend I grew up with in Birmingham, who worked as a Technology Analyst for a large investment firm. We looked at the existing solutions in the industry and thought that we could improve the situation for parents, and so, Tutora was born.
We launched in August 2015 but, at the time of raising, already had over 1,400 tutors and gross bookings of £28,000 in March 2016. A quarter of British children have received tuition, with the industry worth £6 billion in the UK. We were seeking investment to expand rapidly and become the largest company in the sector. The money would allow us to secure new tutors to cover the whole of the UK and advertise their services to students, as well as improving the site and maximising conversion.
I write this not to tell you about our particular business (you can view our pitch here ), but to show you our story (all of which is true by the way – never lie! I’ll come to this). When pitching to investors, especially for seed round investment where your business is likely to be at a more fledgling stage, you need to assess the strength of your story. Will investors want to be part of your future? This, again, is more than just whether they will like your product or service, but whether the whole thing resonates with them.
Write your own story. How does it sound? How likely would a random person be to buy into it? And don’t ask your mum! All of this will help you to get a feeling for the value someone else might place on your business.
Only now get down to the nuts and bolts of your business financials. What are your costs? What is your revenue? What is your burn rate? What are your current sales or user numbers? What is your rate of growth? There are, no doubt, many other articles which will better guide you on this front than I can. But prepare as detailed financials as you feel truly represent the state of your business.
Here I’ll say a vital side note. Do not fudge. Do not exaggerate. Do not lie. You will be found out. Be honest. Admit your business’s flaws to yourselves and decide how you will tackle them. If you can’t think of solutions (the solutions can depend on the investment being secured), then you probably shouldn’t be seeking investment at all. Investors are smart, and will not appreciate being lied to or having things hidden in the figures. You will be found out and it will destroy your credibility. It’s much better to be honest and draw investors into a discussion – you might not convince them, but the discussions will be invaluable. I’ll return to this later.
Once you’ve completed your own financials, look at your sector on a wider basis. What is the size of the industry? Who are your major competitors? How many times larger are they? Who are the third and fourth placed competitors? Will you still be profitable if you are only that size? What makes you different? What are their sales figures? This all serves to help you think about the scale of growth you can achieve and the size your business can become. This will be key to investors, who will be seeking a return on their input, so it should be key to your valuation.
Finally, research raises completed by other companies, whether they are in your sector or not. Sites like Crowdcube or Seedrs let you see pitches which are currently raising or have recently raised. Try to find businesses comparable to your own in comparable sectors. Delve into the financials they provide through their pitches (you may need to create accounts on the site to do this) and compare them to your own company’s financials and industry – this is where the beer mat maths comes into play – to determine, roughly, an initial valuation for your own company. This will be your starting point.
Entering a raise, is not as simple as purely deciding how much your company is worth. Now you’ve put your business plan together, seen the costs of your own business and looked at the size of other businesses in your sector, you should have a good idea of the amount of money you will need to raise to achieve the goals you have set in your plan.
Remember, that you can have multiple rounds of investment, so you do not need to raise all of the money you need at once. It may be that your burn rate means that it is sensible to raise enough for 12 months, but be aware that a raise takes time, so if you’re planning on needing more money in 12 months, you’ll be raising again in 6. This will eat into the time you have for your business, so it may be better to raise enough for 18 months instead and start raising. That will give you more time to show growth.
Indeed, if it is likely that you will need a second round of investment, you will need to plan on being able to make a good return on the initial investment by the time you plan to go back for the A round. Current, and indeed future, investors will not be attracted to a company which is having a down round or one which is not demonstrating great growth since the initial raise, so don’t cripple your company with too high an initial valuation. Even if this is not in your plans, it’s good sense not to invite too much pressure on sales over the next 12 months by raising at an inflated valuation, even if you can get away with it – if the business doesn’t go as well as you’d have hoped, this might make you uninvestable in future.
Once you have decided on all of these factors, you can now take your initial ideas out into the big, bad world of people. No doubt you will have developed your own small network of business contacts in your city. Go out there and get their thoughts. If you haven’t built these contacts, you’ll have to start doing so. This is about setting up the right meetings, asking the right questions and being willing to listen to the answers you receive.
The value of these meetings will be entirely based on the approach you take. Do not seek to justify your valuation – yes, make sure that they understand the factors you have used, but listen more than you speak. You’ll gain more from these meetings if you are open and honest about the issues others raise. Meet as many people as you can and be willing to change your minds.There are hundreds of people who have been there and got the crowdfunding or investment t-shirt. There are ways of using this crowd to your advantage, pulling together their thoughts and feedback to help you reach a sensible valuation. Don’t see-saw between ideas based on each individual meeting. At one point, we had back-to-back meetings with four pairs of investors, each time being given totally different advice and valuations. This goes to prove that business is an inexact science and that ideas are most helpful when
There are hundreds of people who have been there and got the crowdfunding or investment t-shirt. There are ways of using this crowd to your advantage, pulling together their thoughts and feedback to help you reach a sensible valuation. Don’t see-saw between ideas based on each individual meeting. At one point, we had back-to-back meetings with four pairs of investors, each time being given totally different advice and valuations. This goes to prove that business is an inexact science and that ideas are most helpful when set against each other.
We found that the best approach was to use the wisdom of the crowd to pull all of the ideas together. Like working out how many beans are in a jar or the real weight of a cow (there have been experiments on this, by the way), if you ask enough people, the average will be pretty much spot on. Taking this approach, we sought to hear as many different voices as possible, combining the feedback and our research to get to some finalised numbers.
We then began to approach investors and tentatively pushed forward our numbers. Again, whilst we ultimately sought their investment, their opinions were added to the melting pot. Having spoken to so many other entrepreneurs, however, we were confident that our numbers were about right, but understood that discussing a valuation theoretically is different to gaining solid commitments to invest.
The first investor we met ultimately invested £20k but was initially reluctant to meet our valuation. Having met with so many advisors, we were confident in our discussions as we had already covered many of the points raised. Similarly, we had more belief in ourselves as being investment ready, when we might otherwise had been more malleable to the investor’s demands and gained a worse deal.
Ultimately, we secured our raise in just four days, a record time for an Edtech company on Crowdcube. A part of us wondered whether we could have raised the money at a higher valuation, however, we wanted the raise to be fair, as we want our investors to be comfortable for the longer term. Similarly, we’re now in a good position for a future raise, if this is needed.
I think that the important thing to realise is that, in setting out to value your company, you won’t be alone in feeling overwhelmed or out of your depth. Remember that there is no right answer, and ultimately you don’t need to know. Not for a while at least. Be confident, calculate and approach the task methodically. Most of all, don’t do it all alone, and be open to the opinions of others. Seeing the calm in this situation is tricky and pretty petrifying when you are planning on irreversibly giving away a chunk of your business, but with the right approach, a natural solution will gradually evolve.
Scott Woodley – Co-Founder of Tutora, an online marketplace for students and tutors. Scott is a qualified teacher, with a Masters in Law and a BA History degree. An idealist to the core, Scott always seeks to ‘make things better’ and perfect our service: hence our manic workload! He is a keen cyclist, runner and, generally, an avid sports enthusiast.