Evan Carmichael values a web business generating $1,200 monthly revenue. For low-growth companies, use 1–3× annual revenue. For high-growth ones, project five-year cash flows and discount to present value. Raise money in phases tied to milestones to improve your valuation and keep more equity.
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Hi, I'm Evan Carmichael, and in this video I wanted to answer a question from one of my readers, Freestyles, who owns a website called Logo Arena and is having a hard time figuring out how much his business is worth because he wants to raise equity capital from getting an investor on board. So a little bit of background on the business: they have put around $15,000 worth of services into the business. And they're generating revenue of about $1,200 per month. So he's figuring out how much is my business worth, and so he's gotten different valuations from investors and wanted my opinion. So I've been in the VC world before, and we were raising $500,000 to $15 million for companies, and valuation is something that we always looked at. And the cost-based valuation rarely works. So to say, well, I put $15,000 into my business, so it's worth X amount is really hard to justify unless it's an asset that they can go and sell. So if you bought a piece of land, you bought some equipment that they can sell easily, has that tangible asset value, then that's where you can look at cost-based. Usually you're going to look at how much the company is going to be worth, and you want to look at the revenue generated. Now, if you see the business that is not— it's not— doesn't have a lot of growth opportunity, web-based businesses will typically sell for 1 to 3 times annual revenue. So if you see it growing slowly, then you might be looking in that range. So figure out how much you're going to make for the year, times up by 1 to 3, and that's roughly what your company is going to be worth. But if you see it as a high-growth opportunity, so that $1,200 you're making a month, you see it, you know, being 100 times that, then you want to basically look at those growth projections. And that's typically what a VC, a venture capitalist, or an angel will look at. They'll look at for the next 5 years, they want to see what your projections are. So, you know, this year, how much you're going to make next year, the next year, the next year, the next year. So 5 5 years out, how much are you going to be making? And what we do is usually discount that value back. So look at how much you're going to be earning, you know, for those 5 years, discount that back to today, and you get a rough valuation of how much you'd be making. You have to justify that somehow, and a lot of times it's just projection, right? So it's a guess, but you want to have confidence in those numbers, and the more confident you are and the better you can explain your rationale for getting to those numbers, the more faith you have from an investor, and the more likely you'll get a better valuation. At the end of the day, it's still up to you and the investor to come up with that valuation. The further along you are in your goals, the better valuation you get. The closer you are to startup, usually the worst valuation you get. So it's great that you already have some customers, you already have some revenue coming in. A couple things to think about: if you want to get a better valuation, if you know you need to raise $50,000, what you might say is, I need I need $10,000 at this valuation, and if I hit these certain milestones— so maybe, maybe a target is to get $5,000 a month. You say, if I get the $5,000 a month, then I need another $25,000 but at a better valuation. Then if we hit $15,000 a month, then I need another $25,000 at a better valuation, or whatever it is. So you need $50,000, maybe you don't need it all up front, and you can phase it out over a period of time. You keep milestones, you agree with the investor, and Every time you raise the capital, it's at a cheaper rate, so you're not giving up as much equity and you're still getting the money you need. But it requires you to actually go and hit the targets that you set out, so you better make sure you can actually hit those targets. The last thing I would encourage you to think about when bringing on an investor is don't just go for somebody with money, especially in this early stage. If you're looking for an angel investor, you want somebody who can help you, so somebody who has contacts, who can introduce you to people, who can get you out there and help promote your product beyond just somebody who gives you money and either, you know, completely stays away from the business or worse, tries to interfere and doesn't really know much about your business and starts to drag it down a little bit. So think about who the person coming in is. It's a lot like getting married. You got to really like the person. They have to have a lot of potential to help you. So really focus on who that person is before making the decision. I hope that helped. If you liked the video, please give it a thumbs up, and I'd also love to hear your thoughts and feedback if you want to leave a comment below the video. And stay tuned for the next episode.
