Startup valuation is the process of determining the worth of an early-stage company.
It is really hard to determine the exact value of a startup before it goes public or gets acquired by another company. You have to rely on several methods to get a rough estimate of its worth. In this article, we will discuss the top 5 methods applied for startup valuation.
Why we need Startup Valuation?
The main purpose of startup valuation is to get an idea about how much money an investor should be willing to put into that particular business. This can also help you know how much equity you should give up in return for that investment money. For example, if you are looking for funding from angel investors who are putting in $100K-$500K each and they want 10% ownership in your company, then you will probably need between $1 million and $2 million in total funds raised during this round. This means that your valuation should be somewhere between $10 million and $20 million because we are assuming that even after giving away 10% ownership, there will still be enough profits left over for everyone involved at the end of the day (yourself included).
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To know the value of your company, you need to know what is the value of similar companies in your industry. To know this you need to know their financial details such as sales, profits etc., which are not available to everyone as they are private companies. So one way to determine your company’s value is by comparing it with other similar companies that have been publicly listed on stock exchanges or have been acquired by other companies. By doing so, you will get an idea about how much your company could sell for or how much someone might be willing to pay for it if they want to acquire it.
Startup valuation is the process of determining how much a startup company is worth. It is important to note that this is not the same as how much money you can raise in an investment round.
The valuation of a startup will affect its ability to raise capital, so it’s important to understand how it’s done. The process involves determining what percentage of equity you are giving up in exchange for cash or other assets.
Here are some of the most commonly used methods, which we’ll discuss further below:
1) Discounted Cash Flow Method (DCF) – This method is based on projected cash flows from different sources such as revenue and profit over a period of time. The value of the company is calculated using present value techniques based on estimated future cash flows discounted at an appropriate discount rate (usually between 5% and 12%). This method works best for companies with predictable growth in revenues and profits over time.
2) Multiples Method – In this method, multiples are applied to key performance indicators such as sales growth and profitability to arrive at an estimate of value per share or per unit.