Startup Valuation

DATA

The following types of data are evaluated during the valuation of a startup:

Financial and business data – In-depth and well-maintained financial records, revenues, costs, users, transactions, client growth, intangibles, company growth rate, etc. Besides, startups with elevated growth rates get great valuations.

Management experience – Managers with an excellent track record have a positive impact on the value of a company. In addition, the experience of a company’s workforce and its motivation play a significant role in increasing company value.

Market size – The economy’s condition, interest rate levels, total users, transactions, business trends should also be considered when valuing your startup. For instance, a flourishing economy can elevate the demand for certain products and services.

Intangible assets – Trademark, customer relationships, and company reputation can enhance your company’s valuation. Though it is difficult to measure these parameters, they have a significant impact.

Tangible assets – Tools, vehicles, and business premises should be considered and their value assessed. The quality and volume of tangible assets that your company owns can considerably influence its valuation.

IMPORTANCE

Various groups, such as venture capital (VC) firms, corporate M&A teams, investment bankers, business owners, employees, and retail investors, need to take up startup valuation for numerous reasons. VC firms undertake startup valuation to report to limited partners (LPs) about the performance of their investments.

Corporate M&A teams rely on precise valuation reports for investing or acquiring target companies of their choice. Investment bankers should be aware of the value of companies for assisting their clients in buying, selling, or investing in companies. Business owners use company valuation data significantly to get a fair price of their shares during the sale of their venture.

Employees with stock options need to know if the value of their options is increasing or decreasing. Therefore, you need to choose a suitable business valuation method based on the reason for valuation. For instance, if you are looking to sell your business, you usually want a higher startup valuation.

In contrast, you will need a proper company valuation to prevent overpaying if you are into business acquisition. Another parameter that needs to be considered is whether a company is asset-heavy or service-oriented. For an asset-heavy company, the net book value method helps in getting the best valuation number.

PRE-REVENUE STARTUP

The valuation of pre-revenue startups is more complex than the valuation of post-revenue startups because the former does not have any data related to profit and revenue. Therefore, pre-revenue valuation is usually accomplished with the help of many imperfect parameters, such as the excellence of founders, traction, prototypes, and industry inclinations.

Founders – Investors give more weightage to startups managed by experienced and committed teams with varied backgrounds.

Traction – Traction is a crucial indicator for investors. Startups that progress with a low budget draws the attention of potential acquirers because of minimal acquisition costs. Besides, such startups make profits eventually and, therefore, get greater valuations.

Prototypes – Pre-value startups that generate prototypes or minimum viable products (MVPs) also capture greater valuations.

Industry inclinations – The market conditions have a significant impact on the valuation of pre-revenue firms. For instance, if a market is saturated with many competitors and few investors, then the startup will yield a lower valuation. In contrast, if a startup has an innovative patented idea in a flourishing industry, it will get a greater valuation.

Various unique methods are used to value the pre-revenues startups.

POST-REVENUE STARTUPs

Private companies that have begun producing sales are considered to be in the post-revenue stage. Such companies can be valued by employing the discounted cash flow (DCF) method, multiple analysis methods, or the net book value method. All these methods can be used individually or in combination for verifying the valuation numbers obtained.

DCF analysis method – The DCF analysis of a company involves calculating future cash flows and discounting them back to the present day. Assessing mature companies is a simple process because they have consistent financial data that can be used to predict cash flows and evaluate them against identical public companies.

Multiples analysis method – A multiple analysis consists of deducing the valuation of a company using a numerous, that is, a ratio is calculated by dividing one financial criterion (such as value) with another (such as revenue) of equivalent private companies.

Net book value method – The net book value (NPV) method is preferred by companies with sizeable tangible and intangible assets.