Whenever you are about to go meet investors to raise venture capital, you will be facing a very crucial task: finding a valuation for your mobile app business.
The valuation, an agreement between you and your investors on how much your business is worth today, will ensure both parties get a fair deal.
More importantly, it will dictate how much equity ownership you are selling to investors as part of the round, and therefore what is your corresponding dilution.
Remember: this article is for post revenue startups only (mobile apps which already generate some revenue, even if they are still loss making).
An introduction on valuation
Let’s make something clear: valuation will always be a negotiation between two parties, instead of a simple mathematical formula. This is all the more true for early stage businesses where mathematical formulas are based on limited and / or volatile historical performance.
Still, valuation and its negotiation is always based on mathematical formulas. In this article we explain to you how to estimate a valuation for your mobile app using a simple mathematical formula, how you should look at it, and how this valuation can range based on a number of other factors.
The formula: ( CLV – CAC ) x Users
As explained above, any startup valuation is based on one or a number of multiple mathematical formula(s) (when we use multiple valuation formulas, we ‘triangulate’ i.e. we usually use an average or a median of the different methodologies).
This formula can use financials (for instance revenues) when available (for post revenue startups for instance) and/or operational metrics (users, retention rates, etc.) especially helpful for pre-revenue startups.
Note: In this article we focus on post-revenue Mobile Apps only.
An easy mobile app valuation methodology is the following formula:
Valuation = ( $ CLV – $ CAC ) x number of users
The formula assumes valuation is equal to the sum of all your users’ average customer lifetime value, minus their cost of acquisition.
First off, let’s clarify a few terms.
What is Customer Lifetime Value (CLV)?
CLV (Customer Lifetime Value, or LTV for Lifetime Value) is the total amount of net margin you will earn, on average, per user, over their lifetime (before they churn). Net margin usually is equal to Average Gross Profit per User (and not just Average Revenue per User – ARPU).
CLV = Average lifetime x Average Gross Profit per User
- Average lifetime value is the number of months users stay before they churn. Commonly, Average lifetime value can be obtained with the following formula:
Average lifetime (months) = 1 / Monthly Churn
- Average Gross Profit per User simply is the total Gross Profit divided by the number of users. Usually Gross Profit includes revenue minus service fees (Appstore, Google Play) and payment processing fees.
- All users are paying users and pay a monthly subscription of $5 per month
- Gross Margin is 80%
- Users churn on average at 40% per annum, meaning their average lifetime is 30 months
CLV = 30 months x $4 = $120
What is Cost of Acquisition (CAC)?
CAC is the total amount of money you spend to ‘acquire’ one user. Usually, for Mobile App businesses, CAC includes marketing expenses: paid ads, content, salaries of the marketing team, etc.
CAC is therefore the total amount of your marketing expenses over a given period, divided by the number of users you generated over that same period.
Let’s use our example above, and assume you spent $500k over the past 3 months and obtained 10,000 new downloads over the same period, your CAC is $50.
Assuming your app has 40,000 users today, a indicative valuation for your business can be calculated using our formula above:
Valuation = ( $ CLV – $ CAC ) x number of users
Valuation = ( $120 – $50 ) x 45,000 = $3,150,000
Other factors to consider
Whilst using our formula gives us a pretty good idea of how much your business is worth using rock-solid assumptions and numbers, it does not tell the full story and should not be taken as such without considering other factors that can change, up or down, the true valuation of your mobile app.
These factors are:
- Growth: our formula above gives us a picture of your business value at a given point in time, yet does not take into account the speed of growth. Logically, the faster you grow, the more valuable your business is.
Assuming, using our same example above, you acquired 10,000 users in the past 3 months, up from 6,500 the previous 3 months, this is an impressive ~50% quarterly growth rate. Your business would be worth much more than the same mobile app business growing at, say 20% only. So your $3M valuation calculated above would have to be adjusted upwards.
- User engagement: the more your users are engaging with your app, the more likely they are to be paying users, and the less likely they are to churn. All things being equal, the higher user engagement (usually assessed using Monthly Active Users or Daily Active Users as % of total users) the more valuable your business is. Also, if you can show positive development over time, the better.
Let’s assume you have 100k users of which, on average, 60% are Daily Active Users (DAUs). Your business would be worth more than the exact same startup yet with a lower DAU % (for instance 40%).
Valuing a startup is always a difficult exercise. It is the result of a negotiation between existing investors and the new entrants. Yet, the more metrics and financials you have, the easier it is to come up with a range for your valuation, which you will then use to decide on the final valuation for your round.
Calculate your mobile app’s worth using your current metrics (LTV, CAC, number of users) and a simple formula. All investors will likely use the same methodology, so you will have a good idea of your business valuation right away.
The final valuation for your round will eventually be based off this formula and 2 other factors (growth, user engagement) driving up or down the obtained valuation.
Are you looking for a great financial model template for mobile app? Have a look at our expert-built template below:
We also have lots of great free resources for mobile app founders: