Location, just as it is important to many homeowners, it is important to the startup community.
Yes, a startup based in a small, unknown town probably won’t get as much of a pre-money valuation as a similar startup that is based in Silicon Valley. Obviously, the Silicon Valley location garners a much higher price tag of the two. Just as house prices are higher in New York City than in Scranton, it’s a similar story for the valuation of startups.
In addition, startups can receive more interest and backing from angel investors if there is celebrity backing or a celebrity name attached to it. This means that a celebrity-endorsed startup is likely to get more funding than a first-time entrepreneur.
The location, in particular, is important to startup valuations because of factors such as the economy and real estate.
The ups and downs of real estate occur with the highs and lows of the economy. In Las Vegas, for example, a house worth $1 million in 2006 was later only about $500,000 in 2010, but today might have regained its value as the economy in the US enjoys a bit of an upswing. For investors funding businesses, they had a $1 million pre-money valuation in 2010 but that grew to several million by this year.
So, both house prices and startup valuations are impacted by economic fluctuations. In the tough economic times, it is tough to get buyers for real estate, just as it is difficult to get investors for startups.
As well, if a startup requires a lot of capital to get it up and running, that often drives up the startup valuation price too. On the other hand, if little initial capital is needed for a startup, its pricing is usually on the less-expensive end of the spectrum. Another factor that affects the valuation is whether the startup has a proven track record or not; it is a higher price if it has revenues earned in similar markets.
