Valuing a startup is a complex and difficult task, with many factors to consider and often lacking reliable historical financial data. So there’s a lot of confusion about how a startup should be valued, whether it’s raising money or simply valuing its stock.
In this article, we’ll take a look at how to approach your startup’s evaluation using five simple steps. More importantly, we’ll look at the factors that influence startup valuations and the methods you can use to calculate them.
Determining the startup stage
A startup’s valuation depends on its stage of development. For example, a pre-revenue start-up company will be evaluated differently than a company that has been in business for several years and has a proven track record of revenue and profitability.
In fact, investors evaluate the former based on things like team experience and track record, barriers to entry, market size, and the product itself, but when evaluating late-stage startups, they focus instead on financial projections.
Identify market size and competition
is important to consider. Industry scale The growth potential of the market in which the startup operates.
For example, a startup operating in a large market capable of serving in a rapidly growing market is more valuable than a startup operating in a stagnant market in a small capable market. Highly likely.
Additionally, investors will want to understand the competitive environment in which the startup operates. This includes identifying a company’s competitive advantages and understanding the competitive threats it faces.
Evaluate the founding team
The experience and expertise of a startup founder and management team can have a significant impact on the company’s value. Investors want to see a strong leadership team with the necessary skills and experience to execute the company’s vision.
Preparing financial forecasts
Estimating a startup’s financial projections can help determine its value. This includes forecasting the company’s revenues and expenses over a period of time (usually his five years).
Preparation Startup financial forecast This can be a complex task as it involves assumptions about the company’s future growth and the markets in which it operates.
This requires identifying and understanding the key drivers of your business and how they can affect your company’s financial performance.
This could be visitor numbers (such as web traffic), store traffic, or macroeconomic factors (such as the strength of the real estate market).
Use evaluation methods
There are several methods you can use to evaluate your startup. The most important ones are Venture Capital Valuation Methodology for early stage startups, Comparable Company Analysis Methodology and Discounted Cash Flow Methodology (DCF) for mature companies.
Each method has its own strengths and limitations, and it is important to choose the appropriate method based on your startup details and available data.
How to evaluate venture capital
of Venture valuation method is a popular methodology by venture capital firms and angel investors worldwide for evaluating early-stage startups.
Here’s the logic:
- First, we need to calculate what is called an “exit rating”. This is the valuation of a startup in 5 or 7 years based on financial projections using revenue multiples (see below), for example $100 million.
- Then the investor’s rate of return (or “internal rate of returnIRR)
Multiple evaluation method
This method evaluates a company based on ratings of similar companies in the same industry or market. This involves identifying comparable companies and using their financial metrics and valuation multiples to estimate the value of the company under valuation.
We often simply use revenue for early-stage startups (because the profit metric is negative) and EBITDA (and sometimes net income) for mature startups.
This method is the easiest. For example, assuming you used revenue to value a startup and found that a comparable company was valued at 10x his revenue, the valuation would simply be:
Rating = Revenue x 10
Discounted Cash Flow Method (DCF)
This method values a company based on the present value of its future cash flows, discounted at an appropriate rate to take into account the risks and uncertainties associated with the company.
The DCF method involves making assumptions about the company’s future growth and profitability and is typically used for companies with a track record of earnings and profitability.
As such, DCF is only useful for mature companies and is less common for startups. Use only for low growth startups (brick and mortar businesses such as restaurants, hotels, etc.) and not for high growth businesses (digital startups, etc.).
