I have always considered valuing a business or company to be very complicated. The main reason for this is due to the fact there is no one set way to value a company. There are so many ways, factors, and different components that impact a valuation. Each valuation method has its strengths and weaknesses and range in terms of accuracy and complexity. Based on the book "Winning Angels", there are a few valuation methods which are less complex while being very accurate. These include:
2-5 million angel standard
Most angels will invest at a 2-5 million price often set by the entrepreneur
5 million limit
This method is simple. As long as the entrepreneur asks for less than 5 million, the valuation will be okay.
The Berkus method includes five factors (a sound idea, a prototype, quality management team, quality board, and sales) and gives at most 1 million for each factor the business has.
Rule of thirds
The rule of thirds divides equity into thirds where one third of the equity would go to investors.
Along with these methods, there is an article, "How Do Investors Value Pre-Revenue Companies" on Forbes which list other factors that investors look for when deciding valuations. These include:
One thing to remember is that these methods and tools should all be used as guidelines. In the end the investor and entrepreneur has to come to the best educated guess on what the company is valued at based on the factors and components available. While getting an accurate valuation on the business is important, it may not be as important as other components an entrepreneur and even investors in the early-stage of a business have to think about. Ron Conway, iconic angel investor in Silicon Valley recently was quoted as saying, “I will not talk to an entrepreneur about valuations for more than five minutes. It matters little, if at all, whether the investment is made by an institutional investor, an angel group, or an individual. The task (for the entrepreneur) is to build the company that is worth $50 million, Conway observed. “At that rate of growth, no one is likely to care much about a million or two.”
Amis, David, and Howard Stevenson. Winning Angels: The Seven Fundamentals of Early-Stage Investing. London: Pearson Education Limited, 2001. Print.