Startup Valuation

Description

Business valuation is not merely a number play. It requires expertise in terms of technical knowledge and industry experience. It becomes more difficult to apply any one method to arrive at a fair value for a startup.

Difficulties in the valuation of startups:

1. Having an innovative idea for which public information is not available.
2. More profits/growth in future
3. No historical trends

Methods used in the valuation of a startup

1. Venture capital method: In this method, firstly, the post-money value is arrived at by dividing the exit value or terminal value with the expected rate of return. The pre-money value of the business is calculated by reducing the investment amount from Post money value.
2. Berkus Method: The Berkus Method assigns a range of values to the progress startup business owners have made in their attempts to get the startup off the ground.

Each factor is given the value of the business, i.e. the Sound idea, prototype, Quality management team, Startetegic relationship, product rollout.

3. Scorecard valuation method: It is generally used by pre-revenue startups.

As a first step, avg. Value of the comparable startups ( already generating revenue with a similar business model in the same region) and  factored by the weights on the following component:

• the strength of the Management Team (0–30%)
• Size of the Opportunity (0–25%)
• Product/Technology (0–15%)
• Competitive Environment (0–10%)
• Marketing/Sales Channels/Partnerships (0–10%)
• Need for Additional Investment (0–5%)
• Other (0–5%)

4. Risk Factor Summation Method: Same approach as In score card valuation method, however, weights are more broadened as under”

• Management
• Stage of the business
• Legislation/Political risk
• Manufacturing risk
• Sales and marketing risk
• Funding/capital raising risk
• Competition risk
• Technology risk
• Litigation risk
• International risk
• Reputation risk
• Potential lucrative exit

5. Cost-to-Duplicate Method: This approach involves looking at the hard assets of a startup and working out how much it would cost to replicate the same startup business somewhere else.
6. Discounted Cash Flow (DCF) Method: NPV of the cash flow generated by the business.
7. Valuation by Stage: this method is mainly used by angel investors and venture capital firms. It is similar to the scorecard method.
8. First Chicago Method: this method values the business considering all three scenarios, i.e. the worst case, normal case and best case.