HOW STARTUP BE VALUED?

Startups are new business ventures that started up by an entrepreneur as the founder. They focus on developing unique ideas and introducing it into the market in a form of new product or service. When startup grows, it need to be valued. Startup valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a startup business. This valuation provides insight into a company’s ability to use new capital to grow, meet customer and investor expectations, and hit the next milestone. The valuation calculations may account both economics and non-economics factors, such as team’s expertise, product, assets, business model, total addressable market, competitor performance, market opportunity, goodwill, and many more. Some methods are available to be selected:

1. Future Valuation Multiple Approach, focuses on estimating the return on investment (ROI) that the investors can expect in the near future (five to ten years). Several other projections are also calculated, including sales projections over five years, growth projections, cost and expenditure projections, etc. So,the startup is valued based on these future projections.
2. The Market Multiple Approach is one of the most popular startup valuation methods. Recent acquisitions on the market of a similar nature to the startup in question are taken into consideration, and a base multiple is determined based on the value of the recent acquisitions. The startup is then valued using the base market multiple.
3. The Market Multiple Approach is one of the most popular startup valuation methods. Recent acquisitions on the market of a similar nature to the startup in question are taken into consideration, and a base multiple is determined based on the value of the recent acquisitions. The startup is then valued using the base market multiple.
4. The Discounted Cash Flow (DCF) Method focuses on projecting the startup’s future cash flow movements. A rate of return on investment, called the “discount rate,” is then estimated based on which it is determined how much the projected cash flow is worth. Since startups are just starting out and there is a high risk associated with investing in them, a high discount rate is generally applied.
5. Risk Factor Summation Approach values a startup by taking into quantitative consideration all risks associated with the business that can affect the ROI. Under the risk factor summation method, an estimated initial value is calculated for the startup using any of the other methods discussed in this article. To this initial value, the effect, whether positive or negative, of different types of business risks are taken into account, and an estimate is deducted or added to the initial value based on the effect of the risk.
   After taking into consideration all kinds of risk and implementing the “risk factor summation” to the initial estimated value of the startup, the final value of the startup is determined. Some types of business risks that are taken into account are management risk, political risk, manufacturing risk, market competition risk, investment and capital accumulation risk, technological risk, and legal environment risk.
6. Scorecard Valuation Method is another option for pre-revenue businesses. It also works by comparing your startup to others that are already funded but with added criteria.
   First, you find the average pre-money valuation of comparable companies. Then, you’ll consider how your business stacks up according to the following qualities.

• • Strength of the team: 0-30%
  • Size of the opportunity: 0-25%
  • Product or service: 0-15%
  • Competitive environment: 0-10%
  • Marketing, sales channels, and partnerships:0-10%
  • Need for additional investment:0-5%
  • Other: 0-5%

You’ll then assign each quality a comparison percentage. Essentially, you can be on par (100%), below average (<100%), or above average (>100%) for each quality compared to your competitors. For example, you give your ecommerce team a 150% score because it’s complete, fully trained, and has experienced developers and marketers, some from rival businesses. You’d multiply 30% by 150% to get a factor of .45.

Do this for each startup quality and find the sum of all factors. Finally, multiply that sum by the average valuation in your business sector to get your pre-revenue valuation.

References:

• Brex. How to Do a Startup Valuation Using 8 Different Methods. https://www.brex.com/blog/startup-valuation/
• CFI. 2022. Startup Valuation Methods. https://corporatefinanceinstitute.com/resources/knowledge/valuation/startup-valuation-methods/

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