Startup valuation means different things to different people. While investors and venture capitalists use valuation as a tool to assess the potential return on their investment, founders consider it a benchmark to gauge the success of their venture.

Several factors can influence a startup’s valuation, including the company’s revenue, industry, stage of development, and competitive landscape. Yet, two startups in the same industry can still have vastly different valuations – even if they generate the same amount of revenue. Let’s discuss this in detail.

Why May Valuation Differ Across Startups With the Same Revenues?

Two startups with matching revenues can have different valuations for several reasons. Here are some of them.

Growth Trajectory

One factor for the differing valuations is the company’s month-over-month or year-over-year growth. Investors may feel more confident about a startup’s trajectory if it shows a steady revenue increase over time. 

They may also be willing to pay more for a company if it is getting close to profitability or has a significant portion of its revenue coming from customers who have already become repeat purchasers.

Let’s take two scenarios. Company A shows steady revenue increments each month, while Company B is experiencing flat or decreasing revenues.

They both might have the same cumulative revenue at the end of the year, but investors will value Company A more since it shows a more promising trajectory and potential for long-term growth.

Industry Concentration

Suppose a startup has no competition and its services or products are hard to replicate. In that case, it is likely to have a higher valuation relative to one in an industry full of competition. 

For example, Forbes reports that healthcare will be one of the fastest-growing industries in the next five years. Plus, the Bureau of Labor Statistics has also projected healthcare and social assistance to be one of the top five fastest-growing industries from 2019 to 2029.

Quite interestingly, tech is also on the same list. Now, imagine a startup in the health-tech space. If the startup boasts of a unique product or service and dominates the industry, its valuation will be higher than that of another healthcare startup with similar revenues.

Business Model

Another factor to consider is the business model of the startup. A business model with a higher potential for scaling and profitability will generate more value for investors and therefore be valued higher than one with a lower potential for growth.

For instance, a software-as-a-service (SaaS) company will have a higher valuation than a company that derives its revenues from advertising. That’s because SaaS businesses can generate recurring revenue and have a higher potential for profitability.

Diversification

Another factor is the diversification of revenue sources. If a startup has multiple revenue streams or if there’s a strong portion of recurring revenue, this could potentially increase the valuation.

Again, suppose there are two companies. Company A is a tech startup that offers services to the health, IT, and staffing industries. The revenues come from a mixture of these services.

Company B is also a tech startup offering only IT services. So, the revenues come from only one source. Company A will likely receive a higher valuation because there is less risk due to the diversification of revenue sources.

Team and Leadership

The team behind a startup is one of the most critical factors for its valuation. Investors often look for founders and teams who have proven their ability to build successful products and services.

They consider the experience of the founders, the backgrounds of each team member, and any prior Success Stories. Furthermore, effective company culture and visionary leadership are also taken into account while determining the valuation of a startup.

Even if two companies have the same revenues, the brains behind them might be completely different. Thus, the valuation of each will differ accordingly.

Risk Profile

Having the same revenues doesn’t mean that these two startups have the same risk profile. The risk profile of a startup is determined by factors like:

• Competitive environment
• Technical capabilities
• Market position
• Leadership team
• Financial performance

Investors assess risk differently and can attribute different values to startups with the same revenues based on their perceived level of risk. 

Let’s compare a tech startup with a proven business model and a track record of profitable growth to an early-stage startup with an unproven concept. The proven venture will likely have a lower risk profile and a higher valuation than the early-stage startup.

Growth Potential

The potential for future growth is a key factor in determining the valuation of a startup. Even though two startups may have the same revenue, they can have different growth potentials.

For example, a company focused on disrupting an established market will likely have a higher valuation than a startup targeting a small niche.

Timing

The timing of the valuation also plays a role in how the valuation may differ between startups. For example, if one startup is further along in its development and has achieved certain milestones, it may be valued higher than a similar startup at earlier stages of development.

Funding Rounds

The amount of capital raised in past funding rounds can affect the valuation of a startup. Startups that have raised large sums of capital may be valued higher than similar startups with smaller funding rounds.

Get Your Startup Valuation Right

The fundraising process can be pretty complex, and the most crucial part of the process is determining your startup’s valuation. Valuations help determine how much equity you can give up in exchange for the funds you need to get your business off the ground.

Getting a good valuation takes time, research, and data-driven insight. A financial model can be of great help in this regard. At Numberly, we create customized financial models for early-stage founders in the fundraising process.

By incorporating your financial statements, dynamic assumptions, and other data points, our models help you determine the right valuation for your startup. With Numberly’s financial models, you can assess future scenarios and attract investors successfully. Schedule a call with us today.