App developers must understand the critical aspects of valuation, pre-revenue evaluation, startup venture and most importantly seed funding. They must know the answers to essential questions such as
- What are the important factors that investors should consider in determining an app’s value?
- How can they better present their app to attract early-stage investors?
- What are the perspectives from which investors view valuation and provide seed funding?
This article would offer insightful information and key details on how developers can determine valuations and offer different viewpoints for ROIs.
Investment Valuation for Seed Funding
Early stage seed funding is more like a game of poker, each player in the negotiations withholds information and tries to convince the other that his hand is better than it actually is. But valuation for seed funding should not be treated like card games, unlike poker, the objective of investment for any app development is for investors and developers to share information as openly and completely as possible and achieve a common ground and consensus to work together towards a common goal of achieving higher ROIs.
Valuation for a New App
At the time of early investment, valuation is the core determinant for investment, the primary concern is to achieve higher ROIs, in other words; the return to investors is based on the increase in the valuation of shares they receive in exchange for their investment.
Understanding valuation is crucial for both the investor and the developer as contentious negotiations can often get these both off on the wrong foot. More importantly, an investor must understand the growth rate of the app’s potential and about the pre-money or post-money valuation at the time they invest.
So if you can get a specified percentage of the rate of growth during a time period, this calculation must be straightforward with specific reasoning and strategic outcomes. You can also negotiate for a preferred stock or other financing terms such as board seats, controls, warrants or dividends. You can negotiate a contract with easy terms and conditions which are suitable for both the investor or developer with valuation at the time of investment which becomes easily quantified.
Setting Out Milestones
Performance milestones can be set by the developer and communicated well to the investor which may lead to additional shares. The range for this effect on the valuation can be calculated by assuming that all or a few milestones are met. Such milestones can be motivational as developers tend to manage to the milestones set and as progress is made for the first milestones, investment or ROIs can be renegotiated based on the performance or fulfillment of the milestones.
Vulnerability of the Market Conditions
As milestones are achieved, both the developer and the investor can discuss the practical determinant of the valuation based on market conditions. A developer must use market conditions as a starting point in the investment negotiations as investors find it extremely risk to invest in seed funding and look for potential apps that can grow rapidly in the market scenario. App developers who pursue less aggressive growth are unlikely to attract investors for seed funding. In other words; a developer must have the vision and ability to test out its app on the path for higher returns.
An investor also judges the app’s capability if it can survive and grow in the competition. As for the developer, he/she should present the app’s potential based on available data, high-growth opportunity situations according to market trends and dynamics.
Successful seed funding for new applications are based upon the ability of the developer who can better understand what investors look for and identify the technological factors that can justify their higher pre-money seed funding.
So there you have it, by applying the above knowledge, you can make your negotiations more productive and realistic for seed funding or for new app development and better assess its valuation in the coming years.
Stay tuned to this space for our next post that will talk about “Prototyping” in light of app investing in our weekly series of Mobile App Investing for Dummies.