Business Plan and Valuation

Many business owners think valuation is an outcome of how much money they want versus how much equity they want to give away. Both these factors are, in many ways, irrelevant to the investor. The business owner needs to have a clear indication of what the business is worth and this needs to be backed up by a clear valuation methodology.

We’ll explain how the business plan can address these points, and show why valuation is so crucial to a credible and convincing business plan.

One of Delosa’s tips is “Raise as little money as possible in the beginning. Prove the concept, establish a higher valuation, then raise more for less.”. If you’re financing with equity (ie, via the sale of shares), this is classic multi-round funding. As he says, you use a small amount of cash to raise the business to the next level, which increases the valuation. That is, the price per share increases.The founders of the company own the most shares, so they benefit from this. It also encourages the first round investors: when the second round is executed, they’ve made a nice paper profit.

One point that Delosa hints at but does not make explicit is the “Use of shareholder Funds”: be very clear when telling your investors how their cash will be used to grow the business. Telling investors that you’ll use the money to repay loans to founders is not a good look. Investors need to know that the funds will be applied to the growth path, to raise the valuation of the company in time for the second round of fund raising.