It is now time to pull your spreadsheet out again. You need to develop a 5 year financial model for your @ha idea as a business.
Model the key characteristics including:
- the number of customers
- price of your product
- churn rate if relevant
- volume of sales by product line
- volume of sales by geography
- direct costs (to get at your offerings margin)
- indirect costs (overheads)
Once you have developed a stretching AND achievable 5 year model then you need to take the key metrics, customer numbers, revenues or profit and multiply that by the correct 'multiple' for your industry/product or service category.
So, if the most relevant comparable existing company is valued at 3 times their revenues then take your revenues in year 5 and multiply that by 3 and you will have an idea what taking your idea to market will be worth. But to get to the full economic return you need to deduct the capital you will need to raise to take the idea through to exit.
So, if your likely revenues will be $10 Million in year 5 and the multiple for your sector is three times revenues, then your company will be worth $30 Million less the amount of money you raised. If you raised $3 Million you will have delivered an economic return of $27 Million. Then divide this by the likely percentage ownership you will have in the business by then (taking into account the equity you will have to give up to raise money) and you will get to your personal economic return for taking your @ha Idea to market.
As a rule of thumb if your business requires 3 rounds of financing to get it through to profit you can ball park assume that your ownership will end up somewhere between 20 and 30%.
Make sure that this return justifies your effort because two rules will apply from these assumptions:
1. Your economic return will prove to be more rosy than the reality
2. The economic return will take longer to achieve.