Assessing how much is an early-stage startup worth can be very tricky. Even expert investors can find it difficult to determine the valuation of a company before it has revenues, assets and some sort of historic financial data.
As a result, valuation of a pre-revenue startup is often one of the first points of conflict that must be negotiated between angel investors and entrepreneurs. The former want the value to be low enough so that they can own a fair percentage of the equity in exchange for their investment, whereas the latter want the valuation to be as high as possible so they can keep control of a good portion of their company.
Thankfully, an Italian-led Netherlands-based startup called Equidam is coming to the rescue: using algorithms and an automated process it provides startup valuations in a few minutes.
Equidam’s co-founders are Gianluca Valentini and Daniel Faloppa who moved from Italy to Rotterdam in 2011 to do a Master in Finance and Investments, which they both completed cum Laude.
Even though they went through their undergrad studies at the University of Padua at the same time, they really got to know each other while doing their Masters in the Netherlands. Once they graduated they started helping entrepreneurs with matters related to finance, and that is how the idea behind Equidam was born.
Upon graduation, they started collaborating with Dutch equity crowdfunding platform Symbid, and, on the side, they were blogging about finance for entrepreneurs and offering consulting services for startups. Thanks to their involvement with startups they noticed two things: first, there was increasing demand for private company valuations, coinciding with the rise of equity crowdfunding in Europe. And secondly, the company valuation process was not standardized, even though investors were employing the same methods.
Building on their financial background, Daniel and Gianluca decided to create an algorithm for estimating the right valuations, and founded Equidam in 2013.
“Equidam allows entrepreneurs to understand their company value and show it to the world,” says Daniel, “You register on our site and fill out a questionnaire about the qualitative aspects of your business such as strength of the founders and the team, competition, marketing strategy, and so on, and you also include your financial projections. Then, Equidam technology couples your input with 10,000,000+ datapoints on similar companies, drawn from various sources. Through five different valuation methods – two based on qualitative methods and three on financial models, such as DCF – the technology comes up with an average company valuation and provides you with an extensive report.”
Equidam brings the startup ecosystem one step closer to higher transparency and increased automation of this somewhat complex process, making it cheaper and easily understandable.
This allows entrepreneurs to have more leverage during negotiations with investors and get a fair deal, in a very efficient way.
Often startup founders are not familiar with finance and they get to the valuation discussion unprepared. Investors, on the other side, are dealing with these calculations and discussions on a daily basis. When a founder goes into a meeting with the wrong idea about his company’s valuation, he might scare off some investors or end up getting a sub-par offer.
Equidam generates valuations that are the result of several different elements combined and as a comparison of the market value of similar companies, so that entrepreneurs can have a more in-depth understanding of their company’s worth thus a more positive outcome when price is discussed.
“One interesting anecdote I remember shows how our platform helps entrepreneurs in different situations,” says Daniel. “One co-founder after growing his company to about $5m in revenues got kicked out by his two partners for differences in vision. He was devastated but the company kept doing reasonably well. After two years, he heard about a large investment offer, and he was interested in selling his shares to the new investors. Being in bad terms with the other founders, he could not really assess how the company was doing, but needed a valuation either way. So he used Equidam, and this allowed him to start negotiating directly with the new investors and get a fair deal.”
Equidam’s reach is global being active in 78 countries including the US. So far, it has served more than 25,000 companies, most of them are startups in the process of raising an investment round, but the platform is also used for M&A and shareholders reporting by SMEs.
Daniel and Gianluca have obviously used their platform to fundraise for themselves: “We used Equidam for all our funding rounds, both internally to compute our valuation and to send the valuation report to investors. Generally speaking, despite our expertise on the topic, Equidam makes it so convenient that it was much easier to spend 30 minutes on it compared to work on a different valuation model,” says Daniel.