Question

Part A. Outline and explain all the VARIABLES and FACTORS that determine valuation and valuation analysis of entrepreneurial ventures. Be specific in your response. (Note valuation or pricing, the topic of this questions, and evaluation, are two different subjects) (20 points)

Answer 1

VARIABLES and FACTORS that determine valuation and valuation analysis of entrepreneurial ventures

Today start-up is a “culture” rather than business. Young minds are inclined towards this culture and dreamt to be the next Mark Zuckerberg, Steve Jobs, Bill Gates. But the most important thing while considering this is the valuation of their ventures. “Is your venture really worth of billions?”

So every entrepreneur should know what are the variables and factors which can affect the valuation of venture.

1. Revenue Model – Your business must generate revenue and earn profits to have a good valuation. People love free products, free services, freebies. But investors don’t prefer business models which are completely free and doesn’t generate revenue. Example – Canva, a leading graphics designing app is free to use initially. But they have their revenue model by providing subscription services which are premium in nature.
2. Growth – Who doesn’t like growth? It may be salary, it may be personal growth, it may be profits. Investor value those business more who generate revenue and show growth potential. Investor closely watch how old your business is and in which rate your business is growing? The rate of past growth and your future projection will directly impact your venture’s valuation.
3. Profitability – Well, you have revenue, you have growth in revenue but you don’t have encouraging profit, then no one is attracted towards your business. “Profit” is the first thing which drives investors towards business and “Profit” will impact your business valuation. If you can show a promising profitability of your business, then the valuation will be sky rocketed.
4. Brand Value – This is quite common in now-a-days. People are willing to pay more for banded products and services which have created a special connection with people. Take the example of iPhone who connects with people’s emotion and so people are willingly pay more to get this. Similarly, you have to create a brand awareness in people for your products and services. If you have a brand, then definitely investor will pay more to you and value your business more.
5. Competition & Maturity of market – The product and services you are offering belongs to certain sector and industries. If the industry is old enough or matured, then you will not find that spark in investor’s eye. But if your products belong to an industry which is in growth phase then definitely you bag a good amount from investors. Value is more when products are in initial or growth stage of product life cycle.