Increase Valuation

Startup valuations can be improved through a few different ways. Some of the suggestions on the following list are simpler to implement than others. None of these items are overnight fixes, nor are they designed to be an end-all to further the value of your startup. But, the more combination from this list, the higher the likelihood for a substantially increased valuation of the startup. Keep in mind; valuating a startup is a different process than the valuating an established company. Startup valuation is based more from qualitative sources than quantitative sources.

1) Create Initial or Further Intellectual Property (IP)

Future investors gravitate toward startups with intellectual property. This is a no-brainer. Intellectual property shows that the startup has the potential to change the market they are in and will have some competitive protection. No intellectual property, no barrier to entry, extra risk. This may seem black-and-white, and your startup may prove to be the exception to this rule, but this a general rule of thumb to remember. Additionally, the more IP that a startup can secure, the greater the valuation of the startup.

Why? Because more IP directly equates to more opportunity to grow and develop as a startup, with more protection. Yes, securing IP is difficult, no sugar-coating there. But, for valuation-sake, consider the opportunities for investment/increased valuation for your startup. Is it worth it? Keep in mind the different types of IP potential: from patents, to copyrights, to industrial design rights, to trademarks, to trade dress, to trade secrets. Keep your options open, develop more IP, and ultimately raise the valuation of your startup. IP shows momentum. Through IP, a startup shows it is developed and less of a risky investment than a startup with just an idea and a hope.
 

2) Build Mockups and Proof of Concepts (POC)

If a startup is truly still developing, it may not have a fully-designed proof of concept to present to investors. Too often, startups attempt to seek funding just based on a business plan. This early mockup is vitally important to prove to future investors that a startup, in fact, does know exactly where they will focus on. Without a proper POC, investors will become wary of the focus of the startup, and, valuation will be low. Yes, even for seed funding or initial accelerator programs, a POC is crucial. Spend time on this step; do not rush it. A proper mockup or POC is one of the many steps a startup can take to ensure an increased valuation of a startup.

This being said, early proof of concepts should be limited in scope. Multiple, single variable POCs are viewed upon more highly by potential investors during the process of valuation than one multi-varied POC. Think of mockups like scientific experiments. A startup has to prove that the most basic tenet of their plan, invention, or software platform works. One variable at a time. Once part A is proven to be successful, create a proof of concept for part B, or the second stage of the startup platform. Each phase then can be productized as what is referred to MVP or Minimum Viable Product. Keep interested parties abreast during the process of creating proof of concepts. Investors valuation increases based on the progress they feel the startup has made thus far. An established Proof of Concept system offers proof of this progress.

3) Get Early Adopters and Beta Users

Few things prove the validity and future success of a startup than a proven track record/history of success. Investors enjoy the promise of success and return on investment, but what they love more is proof. As a developing startup, having a history to show can be difficult. This is where early adopters and beta users come into play. As soon as possible offer services, technologies, etc. to a select group of interested companies/individuals. Run a beta trial with this small group of customers/users. Investors aside, having early adopters and beta customers will give a startup the early indications of the pros and cons of its current business model. Once you have as positive as possible feedback from your first round of customers, a startup will be able to use this data to prove an increased valuation for itself.

Equally important, early adopters and beta users may be the very companies whom prove the first valuations of startups. Early adopters should be cherished and well cared for by a startup. Research shows that early investors generally have an above-average education level and rely on intuition rather than hard data in their decision-making. Early adopters lead. Through their courageous choice, later investors gain acceptance for the startup and investment and growth defuses to the masses. Early adopters and beta customers are key. Their involvement, support and feedback increases startup valuation.

4) Gain Advance Commitments and Letters of Intent (LOI)

Sometimes startups offer such a prospect of future success that customers, companies, and investors will jump on the opportunity to be a part. Now, while this intent before proof is rare, it is a reality for startups. Be ready for it; seek it out. In a nutshell, a letter of intent offers a non-binding agreement; future investors may see it as tangible evidence of the future success of your startup. And, important to note: the specific customer whom offers the letter of intent matters. It’s great if Joe Schmo writes a LOI for your innovative software development; but if a major company offers a LOI, that’s grounds for celebration! Now, be warned. Advance commitments and letters of intent are non-binding, something may change and that once interested customer may no longer be so interested.

As far as startup valuation is concerned, consider letters of intent as similar to early adopters and beta customers. Valuation will increase with LOIs, because value comes with the value that the issuer of the LOI brings to the table. Other companies will have more trust (therefore a higher valuation) in a startup with letter of intent agreements with major companies, distributors or investors.
 

5) Add Partnerships

Early-stage strategic partnerships increase startup valuation. More and more, investors, including incubators and accelerators, are looking to create partnerships with emerging startups, even before said startups seek investments. Think of partnerships as co-signers on a loan. The bank will issue the loan, not because they trust the individual, but because they trust the co-signer. Same goes with the valuation of a startup. If a startup partners with a major player in their industry, those that are valuating the startup will look at that partner. The valuation will increase based off their involvement with the startup. Do be warned, however; partnerships are not to be taken lightly. Seriously consider any partnership option before locking in, as partnerships are legal give-and-takes, mutually beneficial contracts. Partnerships build trust in startups. Trust builds the valuation. Partnerships, therefore, are a key player in increasing startup valuation.
 

6) Build a Solid Team and Advisory Board

Last, but certainly not of least importance to a startup’s valuation is the startup’s core team and advisory board. Just as partnerships and early adopters add value through their involvement/support, so to do the individual members of the startup’s team and advisory board. To separate these two groups out, a startup’s team should be composed of individuals with the necessary burning passion and skills required to ensure the startup’s future growth and stability. The sooner an individual with past experience with successful startups, especially in the same market, can be brought onto the main team, the better. Future investors will increase valuation if there is past proof of success within the core team. The same principle applies to the individuals who serve as the startup’s advisory board. An advisory board should be comprised of individuals who are experts in the field of said startup. Their expertise and guidance will show potential valuators that the startup has strong leadership and guidance. Valuation of the startup will increase with more with each individual the startup can add to either the core team or the advisory board. An individual with past success, strong leadership and who is deeply vested in the future success of the startup will bring greater valuations, as valuators will future trust the startup. And, as noted in the previous paragraphs, trust and faith go miles in startup valuation.

 

Remember, investors will put much more value on a startup with any combination of the six above listed items, than a startup without any of them. It’s logic and is common sense. The startup with the most to bring to the table when it’s time for a valuation will fare much better than startups with just an idea and a vision.