How to properly value Your Bitcoin startup

This week we’re doing something a little different, as I was in Malta for the SiGMA gambling conference, I asked a good friend and all-around sharp businessman to pinch-hit for me. John Goldberg is both a successful investor and entrepreneur, having invested in and started several businesses—most recently Pixel, which is an on-chain identity service built on the Bitcoin SV blockchain. 

The question I posed to John was one that most first-time entrepreneurs have is, “How do I value my company?” 

In our Ayre Ventures pitches, I’ve seen valuations that were so far out of line that it causes some trepidation when considering the initial proposal. The startup had valued their work and their company, I should say, they valued their idea in the millions, but it hadn’t progressed beyond that back of the napkin stage we’ve talked about in past articles. Also, I’ve seen startups ask for a number so low that it wouldn’t cover the costs of a good lawyer, it was like they were afraid or felt guilty asking for investments.

John Goldberg was kind enough to share with me his method for placing a valuation on his new startups, and we believe you will find this useful.  

How to properly value your startup

When valuing your startup, you need a few key things: capital requirements, target network, target market, projected volume, and projected revenue chart (1-3 years with different scenarios).

Capital requirements

You need to get past the initial investment and funds you’re raising and look at the long-term picture for your company. Most Venture Capital (VC) firms are looking for a return in 3-5 years or sooner, and they expect a sizeable return. Just like credit, VC bridges the gap for you to fund the project and grow your business, making it profitable.

10% 25000
20% 50000
30% 75000
40% 100000
50% 125000
60% 150000
70% 175000
80% 200000
90% 225000
100% 250000
Value 250,000

 

If you want to raise US$100,000 for 40% of your company, that would mean you are valuing your company at US$250,000 currently.

Make sure to always factor in these costs

  1. Office
  2. Electric
  3. Water
  4. Internet
  5. Salary – Keep your personal salary small. At Pixel Wallet, we pay ourselves $1.00 a year. We choose to invest the rest of the money into the company as we can live on personal savings and other investments
  6. Hardware

Target network

Write a small paragraph on what you see your product doing better and more effectively than others.

If you are a wallet, for example, explain why your wallet is better than the many other wallets in the marketplace, demonstrate what features it offers that make it unique and desirable. 

Also, if you are a wallet, show how it makes money, this is critical for a VC to invest in your company. 

Will you be charging a fee or cutting a deal with miners to get a rebate back to you for hosting? These are all things you need to factor in to value your company positively.

Target market

Spend time analyzing the Target Network; this is critical for your business evaluation. Look at how your product will fit into the world like a jigsaw piece in the global structure. 

If there is a product similar to yours, study it and build a strategy on how you will outperform them. 

Do a cost analysis of where your product dominates and is more profitable than them. 

Do a simple one- to two-year graph in Excel, study the cost they use, then do a layout of your product to fine-tune your product to make it more streamlined. 

Consider GDP, mobile phone dominance, unbanked, internet access and environmental impact.

Projected volume

How many users do you see using your new product? 

Do a simple flow chart and break that down over three years to show the long-term expectations. Any successful startup needs to think of the future. Your VC will look at where you will be in 3-5 years, or even later. 

For this chart, even if you think your numbers will be more significant, have a level head and keep the projections lower. It is better to use smaller amounts and grow larger than not be able to meet expectations. 

  1 Year 2 Year 3 Year
Scenario A 5,000 users 10,000 users 20,000 users
Scenario B 25,000 users 50,000 users 100,000 users
Scenario C 125,000 users 250,000 users 500,000 users

 

You should project out and look to double your numbers yearly, if possible. With a startup, these are only projections so keep yourself grounded, don’t try to grow from 1,000 users to 500 million users in six months. If your projections are so unrealistic most VC will pass on your project as you’ve shown them that you have no logical way to run a business. Remember it’s important to keep it simple and effective.

Projected revenue 

From your projected volumes, show how much each user will generate. For example, if each user is on average 50 cents a month, $1 a month and so on, this will help you with laying out the cost of running your day to day operations and see the lowest possible average. (Do not cost basis on highest cost)

Do a cost break down on the lowest reasonable average so that way you stay realistic and can also see how much your company will be bringing in to show if it will be profitable in the worst-case scenario. 

It is advisable to do the same with an A, B, C scenario of revenue. Don’t worry if the numbers are low in the worst case as you need to be realistic with your valuation. Show a VC what you have laid out—that way they can see the numbers as it will help gauge if they want to invest in yourself and your product.

Lastly, speak the VC language

You may be excellent at coding, but when you’re talking with a VC, they are excellent at numbers, so you need to speak their language. So take your time just like you built your project and review your numbers and ask people you trust to review them as well. Using these steps will help you value your company and show what it’s worth.

Interested in making your pitch? Learn from the people, like Ivy Dang of CityonChain, who pitched their projects to a panel of investors in Seoul for the first ever Bitcoin Association Pitch Day. Watch all Pitch Day videos on The BSV Pitch YouTube playlist.

Watch this space for more information concerning the next Pitch Day as part of CoinGeek Conference London this February or if you feel your business is ready for investment, feel free to send your business plan and pitch deck to [email protected].

New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.