During an economic recession, investors with money in financial instruments such as mutual funds and ETFs may have a portfolio that has dropped significantly in value. So since they generally have less money, their motivation to invest in risky assets takes a hit.
From an investor’s perspective, valuations are most reasonable when startups are having a harder time raising money. For example, a company I knew in the beverage industry was valued at $45 million when valuations were skyrocketing. A year later, when the economy was calmer, the valuation was $10 million.
Another company I spoke to on the diagnostics front de-risked their offering by demonstrating major progress and more favorable data. But because the economy had softened, their valuation still fell from $35 million to $20 million.
Angel investors will often review valuations both themselves and as part of an angel investment group. This results in a collective due diligence process that aims to arrive at fair valuations through both group management and angels from diverse backgrounds. The benefit to founders is that if an angel refers you to their group, other angels in the group will often invest as well.
Understand the market
When looking for investments, make sure your valuation is realistic for the type of innovation and market segment, and aligned with the state of the economy.
When assessing future investments, I make sure it’s a product or service I care deeply about and educate myself about the company’s market. I want a fair valuation of the company and a well-defined market worth at least $100 million. I also assess whether the product or service has a significant advantage over the competition.
To determine your valuation, you need to understand your market.
If your company has a minimum market threshold of $100 million in a large total addressable market (TAM), clearly explain how your company’s innovation solves a huge problem in a space that lacks solutions or is substantially better than existing products and or it can be scaled quickly.
Determine the valuation of your company
When considering an investment, “What’s your valuation?” is one of the first questions I ask.
Valuation has two primary concepts: pre-money and post-money.
Pre-money valuation is the value of the company prior to an investment, and post-money valuation is what it is worth after investment.
Janice has been with businesskinda for 5 years, writing copy for client websites, blog posts, EDMs and other mediums to engage readers and encourage action. By collaborating with clients, our SEO manager and the wider businesskinda team, Janice seeks to understand an audience before creating memorable, persuasive copy.