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Increase Your Startup’s Valuation By Proving Assumptions

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A startup’s valuation is determined by two major factors: the business opportunity and the level of uncertainty. The business opportunity is usually the possible return on investment at exit (i.e. IPO or M&A). The level of uncertainty is usually the number of assumptions in the business plan that need to be proved, and their impact on the possible exit (e.g. having millions of users). Like any other investment, the possible return on investment has a positively effects the valuation, and the level of uncertainty negatively effects it.

When it comes to your startup, the business opportunity is usually pre-determined. You can improve it with a creative business model, but there’s an external limit to the market size. On the other hand, you can decrease the level of uncertainty at very early stages, by proving some of the major assumptions of your business plan.

Unless you’re in the Biomed space or trying to develop some sophisticated hardware, technology is rarely a risk. The major risks are usually on the business side. The first major risk is whether people want to use your product or service. The second one is the lifetime value of a customer. And the third risk is the customer acquisition cost. If people don’t want to use your product/service, or if the lifetime value of your customer isn’t significantly higher than the customer acquisition cost, then you don’t have a viable business.

There are many ways to prove (or at least partially prove) these assumptions before even writing one line of code. If you want to learn how, then learn all you can about the Lean Startup Methodology. I would start with this series of lectures by Steve Blank and this lecture by Eric Ries. You can also find some great ideas in Tim Ferriss’ book and blog “The 4-Hour Workweek”.

To conclude, if you want to increase the valuation of your company, start proving the assumptions in your business plan as soon as possible.

 

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