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    Valuation of Early Stage High Tech Startup Companies

    Valuation of Early Stage High Tech Startup Companies: Investors have been buying shares of many fast technology-growing companies in recent years. Potential investors or buyers who want a stake in high-tech companies need to know the valuation of early stage high tech startup companies to see if it would be a profitable business or not.

    On the other hand, company owners need to understand how to value their company and its assets so as not to be losing out in selling shares to investors. This has led to many high technologies companies‘ desire for business valuation. To find out the proper valuations critical to investors, we arrived that some principles are excellent means of valuing even high-tech companies.

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    How to do Valuation of Early Stage High Tech Startup Companies?

    Valuation of Early Stage High Tech Startup Companies

    There are similarities between the valuations used for high technology companies. So, to make the valuation more precise, start your valuation from the market size in the future and possible return on investment. Use the following parameters to perform a fairer business valuation of your tech company:

     

    1. Start from the future
      Think how the company’s future would be in years to come when valuing the tech company. Consider the uncertain and sustainable conditions, the past to present performance, and the current growth rate. Measure the company’s future state with operating performance like sustainable margins, customer market penetration rate, return on investment, and average revenue of every customer.
    2. The size of the market
      The market size is another parameter you should use to get a fair valuation of a tech company you want to buy or sell. You can check the number of customers they have for the last year, their customer reviews, and how they have converted prospects to their paid customers. Also, check if they exist in many local or global markets. This will give you a clue about their sales and marketing strategies.
    3. Develop weighted scenarios
      Using probability-weighted scenarios, you can deal with all uncertainties a growing high-tech company is associated with. This method is very straightforward and straightforward. You should have a few strategies developed to make every critical interaction and assumption clearer or more transparent. This modeling approach is more evident than Monte Carlo simulation and natural options.
    4. Work from past to current performance
      When you are done valuing a high-growth tech company by having their operating margin, market size, and capital intensity forecast completed, connect the result of your projections or analysis to the company’s current performance. You can do this by assessing the transition speed from the recent version to the potential long-term and future performance. Every estimate should be consistent with industry attributes and economics principles.

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    valuation of High Tech Companies

    There are lots of posts on business valuation-related to tech companies. This is due to the recent hype about the valuation and acquisition of tech companies globally. An example is PayPal and flutter wave.

    Business valuation on tech startups can be carried out in many methods. Some of them are the Berkus method, High Tech Companies,  comparables method, discounted cash flow methodology, and others.

    This article guide tech entrepreneurs on how to value their startup company to raise funds.

    How to value tech companies

    These are different steps in doing the valuation of early-stage high tech startup companies. However, we will look at these two:

    • Identify the total addressable market.
    • Find comparable tech companies.

    1. Identify the Total Addressable Market

    The Total Addressable Market, which is represented in short as TAM, gives an indicator of the possible size of the tech company in the future. You must look at the potential company’s size in the future if you want to invest in a tech startup. Check up for bottom-up sizing instead of top-down sizing. This is a way to get the measurable and realistic size indication of the startup more in the future. A clearer and quantifiable description of the startup in the future will offer you a fair value of what the business will generate when everything goes well as planned.

    When the total addressable market has been identified together with the potential company’s size in the future, you are closer to knowing the value of the tech business.

    2. Find comparable companies

    While it is advisable to look for similar companies to know the value of your tech startup, don’t overlook other companies with the same model but in different sectors. The main thing is that the comparable companies have similar business models to the tech company you want to find the value or build.

    Suppose you’re developing or are already in a tech company that offers software services. In that case, you can look for comparable companies such as Dropbox, Open Table, Box, SalesForce, and the rest. You should also check out data linked to EBITDA, valuation, and sales. Also, check for enterprise value and market capitalization data if you are looking at private or public companies.

    Businesses in their early stage are loss-making. Thus, using sales as a proxy is advisable though the value tech companies get from using it is not fair enough to the value derived from EBITDA. In other words, EBITDA is a better and closer proxy to the inherent worth and cash flows.

    Next, you should find the average of the comparable companies’ EV/Sales or Price/Sales and EV/EBITDA ratios. A discount rate to market risk, liquidity risk, and other market factors should be attached. You will arrive at your multiple at this point, which helps significantly in assessing the valuation.

    Conclusion

    To not pay more than a tech company’s value or to sell below the fair price, it is advisable to carry out a business valuation on the company. Depending on the method of valuation you want to use, have the abovementioned approaches as parameters. They will give you a  better understanding of valuation of early stage high tech startup companies.

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