Seeking Funds for Expansion? Here're the Right Ways to Approach Investors
Before approaching angel investors and private equity firms, a company needs to estimate its valuation and accordingly, demand money from the investors
Every small company envisions to plunge upward to become something big. In the trajectory of a business enterprise, a situation usually arrives when the company has to decide whether to flap its wings and move to another elevated place or sit still and work at its normal pace. Expansion and growth are always prerequisites for widening business operations.
How to Become a Niche Company?
Many startups emerge and begin thriving in a short span of time. Flipkart, Paytm and Ola Cabs are some of the startup companies which have made it to the end and have transited into a successful business model.
The above-mentioned companies hoist their respective business by stepping into the untapped market, employing strategies for market expansion and lastly, acquiring funds from the investors as well as private equity funds.
The last step that is, funding is the most crucial element for the expansion of the business. In order to have three-fold revenue, a company needs to invest capital in the business and increase operations to receive high profitability. For gathering funds, a company can approach angel investors and private equity firms. Before approaching these two parties (angel investors and private equity firms), the company needs to estimate its valuation and accordingly, demand money from the investors.
How to Estimate the Valuation of the Company?
At the present time, there are various ways to gauge the valuation of the company. Some of the common methods of valuation are:
1. Discounted Cash Flow Method
Under this method, the present value of a company’s future cash flow is calculated and subsequently, discounted according to the risk factor involved in the business.
2. Capitalization of Earning Method
In this method, a company’s future profitability is determined by calculating cash flow, estimated valuation of the company and yearly ROI. By using this valuation method, a company’s valuation can be estimated for the present time as well as the future.
3. Assets-based Valuation Method
Herein, the company’s valuation is estimated by gauging the total value of the assets and then, subtracting total assets’ value from the liabilities that the company possesses. In this way, the company’s valuation is done.
4. Market-based Valuation Method
In this method, the company’s valuation is done on the basis of purchases made by it. Secondly, sales of the competitors in a similar business segment will also be gauged, thus, concertedly estimating valuation.
Here’s How Companies Should Decide on their Valuation
When a company begins valuing its business, it should follow regulations and curate an accurate valuation figure. If the company demands a much high or low price then the investors doubt the knowledge of the entrepreneur and eventually, the proposal gets rejected.
1. If a Company’s Valuation is Nearly $1 Million
A company's valuation should be almost $1million when it is procuring investments for the first time. In this case, the first-time investors will be angel investors, friends, relatives and family.
If the company calibrates valuation to sell the business, then the buyers would unlikely to pay more than $1 million.
2. If a Company’s Valuation is Between $1 Million to $3 Million
A company should use the valuation, ranging from $1 million to $3 million, to attract and reward people or investors who shored up the organization in the beginning. In this scenario, the primary investors are not angel investors, friends and kins. However, the early-stage investors would be offering help, besides endowing money, to build an image of the business.
Social Proof is a strategy that necessarily fits here. In essence, social proof is a mode of advertising the business by word of mouth, majorly by employing renowned people like market experts and celebrities. These people strengthen the social reputation of the business which, in turn, increases the valuation of the company.
Besides the above-mentioned valuation types, there are various other valuation structures over $ 3million which comprise distinct method altogether.
This article was originally published by Jaspreet Kaur.