Finance & Capital mentor Guy Kawasaki responds:
Valuation of young companies -- especially Internet start-ups -- can be tricky. In fact, a well-known investment guru once said that if he were teaching a finance class, he would fail any student who attempted to explain the valuation of Internet start-ups.
In my experience, there are no commonly accepted valuation methodologies. Instead, venture capitalists generally value a start-up based on the current climate and recent comparable deals in the venture funding world. More traditional valuation methods generally do not apply to Internet start-ups, which often have no revenues and no profits at the time of their funding rounds.
In valuing a start-up, investors generally look at the strength of the team, the size of the market, the business model (i.e., how the company will generate revenues and profits), and the stage of development. Venture investors will also consider the price other investors have paid for equity in comparable start-ups in similar markets.
Do research on the funding of start-ups that are in your market to get as much information as possible before meeting with investors. Study articles and Web sites of your competitors. Fee-based research databases, such as those provided by VentureOne (http://www.ventureone.com) and Venture Economics (http://www.ventureeconomics.com), can also be helpful.
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