In simple terms, startup valuation is the process of quantifying the worth of a company, aka its valuation. During the funding rounds, an investor pours in funds in a startup in exchange for a part of the equity in the company. Therefore, valuation is important for entrepreneurs as it helps in determining the equity which they have to give to a investor in exchange of funds.
A high startup valuation is based on the startup being able to show or possess the following things:
• Traction – One of the biggest factors of proving a valuation is to show that your company has customers. If you have 100,000 customers you have a good shot at raising $1 million.
• Reputation – If a startup owner has a track record of coming up with good ideas or running successful businesses, or the product, procedure or service already has a good reputation a startup is more likely to get a higher valuation, even if there isn't traction.
• Prototype – Any prototype that a business may have that displays the product/service will help
• Revenues – More important to business-to-business startups rather than consumer startups but revenue streams like charging users will make a company easier to value.
• Supply and Demand – If there are more business owners seeking money than investors willing to invest, this could affect your business valuation. This also includes a business owner's desperation to secure an investment, and an investors willingness to pay a premium .
• Distribution Channel – Where a startup sells its product is important if you get a good distribution channel the value of a startup will be more likely to be higher.