How can you use financial projections to support your startup valuation?

1 Step 1: Define your business model

The first step is to define your business model, which is how you create, deliver, and capture value from your product or service. Your business model should include your value proposition, target market, revenue streams, cost structure, key resources, and competitive advantage. Your business model will help you identify your key assumptions and variables that will affect your financial projections.

2 Step 2: Build your financial statements

The second step is to build your financial statements, which are the documents that summarize your financial performance and position. The three main financial statements are the income statement, the balance sheet, and the cash flow statement. The income statement shows your revenue, expenses, and profit or loss over a period of time. The balance sheet shows your assets, liabilities, and equity at a point in time. The cash flow statement shows your inflows and outflows of cash from operating, investing, and financing activities. You should build your financial statements for at least three years, using monthly or quarterly data.

3 Step 3: Test your assumptions and scenarios

The third step is to test your assumptions and scenarios, which are the factors and events that influence your financial projections. Your assumptions are based on your research, data, and experience, and they should be realistic, consistent, and verifiable. Your scenarios are the possible outcomes of your assumptions, and they should include a base case, a best case, and a worst case. You should test your assumptions and scenarios by using sensitivity analysis, which is a technique that shows how your financial projections change when you vary one or more assumptions.

4 Step 4: Estimate your valuation

The fourth step is to estimate your valuation, which is the estimated worth of your business based on your financial projections and other factors. There are different methods to estimate your valuation, such as the discounted cash flow method, the market multiple method, and the venture capital method. The discounted cash flow method values your business based on the present value of your future cash flows. The market multiple method values your business based on the average multiples of similar businesses in your industry or sector. The venture capital method values your business based on the expected return of your investors. You should use more than one method to estimate your valuation and compare the results.

By using financial projections to support your startup valuation, you can demonstrate your potential, plan your strategy, and justify your valuation to potential investors, customers, and partners. However, remember that financial projections are not guarantees, but estimates based on assumptions and scenarios. You should update your financial projections regularly and adjust them according to your actual performance and feedback.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?