To further understand this method, I will illustrate it using an example.
Let’s say a company had RM5 million revenue per annum which generated a profit before tax of RM1 million a year. The company can be valued at RM5 million multiplied by 5, that is, RM25 million. The number here is 5 – but why is 5 used and not other numbers? It would depend on what industry you are in. Of course you would want the highest possible you can get since you are selling; but on the other hand, your buyer would want it to be reasonably low as possible. Once the numbers have been decided on, the founders could then offer perhaps 10% shares to new shareholders who inject additional cash of RM2.5 million to help bring the company to the next level.
What if you do not have any revenue, as you are just a startup. My advice is, please do not value your business solely with a pure idea. Without any traction, no investor would feel safe entrusting their money with you. Raising funds is raising a believer – starting with users that believe in your prototype, is traction. Simon had millions of social media followers, and that is awesome traction. However, his first valuation that got rejected was using the Top-Down valuation method, i.e. offering 1% of a USD1 billion market. It was a huge mistake done by Simon in the earliest stage of trying to obtain investors. When dealing with a venture capitalist, this certainly was nothing but a stupid move.
Another wrong approach to value a company is by pegging to the competitor's valuation, “Because a unicorn is worth X amount of value, hence my company should be worth at Y amount of value.’’. Simon hired an accountant and financial expert to value his company using financial projections was also a wrong approach. You see, smart investors will never bother to look at your financial projection; you can only attract angel investors but you will be stuck if your valuation is too high in the beginning.
Simon pathed his funding road map out with the help of the CFO he met, and described in detail his pitch deck on an equity crowdfunding platform. He resonated his vision as per the road map, to his fans on social media. Successfully, within seven days he managed to raise RM2.7 million. With an infinite business mission and sufficient funding, Simon brought his business to the next level.