Common valuation mistakes (and how to avoid them)

Valuing your business is one of the most important steps when seeking investment, offering equity to employees, or approaching an exit. Yet, many founders stumble into the same pitfalls when doing so.

These common mistakes can cost founders credibility, accuracy, and slow the growth of their business. Here, we will explore how these mistakes can have an impact on your business, and the steps you can take to minimise them.

12 common valuation mistakes

1) Relying on a single valuation method

It is easy to fixate on a single method to value your business, especially when one in particular gives you the highest valuation. No single method tells the whole story, and this is especially true for early valuations. 

The solution: 

You should use multiple valuation methods to cross-check your figures. For example, combining market comparison, asset-based valuation, and future earning projections will create a more well-rounded and balanced view. 

Each method considers a different aspect of your business, and whilst you may end up with a range of values, it shows investors a more complete picture of your company as a whole.

2) Not taking into account market conditions

Setting a valuation without taking into account wider market trends and growth rates can skew your results and lead to unrealistic expectations.

For example, a business in a booming sector may require a higher valuation than one in a declining industry, despite having similar financials at the time of valuation.

The solution: 

Stay up-to-date and informed on industry trends and competitor valuations. Research recent deals in your sector to understand what investors are actually paying for businesses like yours, and place yourself within the economic conditions in which it exists.

3) Inflated projections

Overly optimistic revenue or growth projections might look good on paper, but these can often raise red flags for investors, and affect investor relationships down the road.

The solution:

Be realistic and back your numbers with proven evidence. Investors prefer achievable predictions to sky-high (and unattainable) figures. Build credibility by using multiple methods that substantiate your claims.

4) Not accounting for debts and other hidden liabilities

Valuing your business without factoring in debts and other liabilities will result in an inaccurate and overshot valuation that doesn’t reflect the true state of affairs. 

The solution: 

Conduct a thorough audit of your business’ liabilities. Be transparent with investors about any other debts and factors that are limiting your valuation. Transparency builds trust, and honesty will avoid any unpleasant surprises during due diligence.

5) Failure to document assets properly

Forgetting to document all tangible and intangible assets—such as intellectual property (IP) and trademarks—can significantly undervalue your business. These features can boost your valuation when documented properly!

The solution: 

Maintain detailed records of all assets. Ensure your IP is legally protected, and highlight any intangible assets in your valuation report. This shows organisation, and can increase your overall valuation.

6) Comparing to the wrong companies

Benchmarking your valuation against vastly different companies, such as those at a different stage of growth or that fall into different industries, will skew expectations.

The solution: 

Focus on comparable businesses in your industry, and ensure they are at a similar stage of development. The more you can mirror your business model against another company, the more accurate your valuation will be.

7) Only considering the founder perspective

It’s easy to value your business from your perspective as a founder, without considering how someone may view it from a different perspective. Investors will take a different view, so it’s important to consider their angle.

The solution: 

Put yourself in the shoes of the investors. Understand their previous investments, and how that correlates to the value of the business.

What are their values, return expectations, and how risky were those investments? Tailor your valuation to align with how they would view it.

8) Not accounting for dilution

Forgetting how future funding rounds or employee options will dilute current ownership can lead to unrealistic valuations and dissatisfaction down the line.

The solution: 

Use investment round modelling tools to visualise how future funding rounds will influence ownership and dilution. This will directly influence how much you offer to investors, and this correlates with the value you place on your business.

9) Valuing too high too early

Setting an ambitious valuation too early on can deter investors, especially when you don’t have the data to back it up. Overvaluations will likely lead to a future down round, which can demotivate founders and frustrate investors. 

Overvaluations may not be intentional, especially in the case of valuing a pre-revenue startup. Projected revenue may not match up with what actually rolls in, so it is important to negate this risk as much as possible, and factor this into your valuation.

The solution: 

Consider alternative funding methods, such as an Advance Subscription Agreement, where you delay assigning a definitive valuation until a later stage. This allows you to justify a higher valuation over time.

10) Don’t forget the milestones you’ve achieved 

It is easy to focus on future projections and market potential, but in doing so you risk omitting key milestones and achievements that could boost your current valuation.

The solution: 

Highlight milestones that add credibility and value to your business. This might include assembling an experienced team, validating market research, or developing a working and viable product. 

These milestones reassure investors that you are proven to execute your vision.

11) Disconnect between raise amount and valuation

Misaligning your raise amount and valuation, such as asking for ‘£500k for a 5% stake’, without considering the wider valuation implications this may have. 

The solution:

Double-check your numbers. For example, £500k for a 5% stake implies your business is worth £10m—does this align with your business stage, market, and investor expectations? Ensure your ask is realistic and justifiable.

12) Fixating on valuation price above other investment factors

Focusing solely on securing a high valuation price and overlooking other crucial factors in the investment terms could devalue your business. What else are you offering, beyond the business value?

The solution: 

Take a holistic approach. Consider what’s on the table other than the price tag. 

Share rights, investor relations, and governance structures can all have a long-term impact on the success of your business. Ensure your offering is well-rounded, and not just weighted on the ticket price.

Join us!

Getting your valuation right isn’t just about crunching numbers; it’s about presenting a well-rounded, credible story about your business.

Securing your valuation is just the start of your fundraising journey. Did you know that with our InVestd Raise add-on, we provide comprehensive support to guide you through the entire process? 

Book a call today to streamline your fundraising journey and unlock the tools you need to succeed.