Startup valuation refers to determining how much a startup is worth compared to the market, depending on multiple factors. The key to valuing your startup involves a financial analysis and valuation document. Entrepreneurs follow this specific step to estimate the market value of startups instead of relying on their subjective assumptions.
The first thing to consider for valuing your startup is identifying its size, development stage, and potential growth. Next, analysts apply adequate valuation methods to find the worth of the business as accurately as possible. Last, they consider risk factors, such as cash flow and market competition, to adjust the value of your startup. The objective is to comply with the standard methods; hence, the valuation of your company is reasonable and realistic compared to the market.
In addition, you can value your startup differently depending on the financing stage. The three earliest stages of a business are the Seed Round, Series A, and Series B. Seed startups earn little revenue, and the funding usually goes to the initial costs of starting the business. Series A develops a business model that monetizes the business ideas, while Series B expands the startup based on the well-established foundation of previous stages.
Some common approaches to valuing early-stage startups are as follows:
You should have seen it coming, of course, there isn’t a single method with which startups are valued, this is because of the intrinsic uncertain nature of startups. Startups are businesses that don’t have a lot of historical data and that are highly volatile, this means that they could go to zero or one-hundred in just a couple of months.
This is why valuing a startup is much harder than valuing a normal business. Either way, let's explore the various common methods.
This approach is probably the most popular for evaluating a startup. The method is very simple, you need to look at what other similar companies are sold for and you get the value of your startup. For instance, if companies in your sector are selling for around ten-times sales, you can get the estimate for your startup in that way.
The problem resides in finding companies similar to yours, every company is different and there probably isn’t recent data about an acquisition of a company in you field. In addition to this, it is hard to value very early startups or pre-revenue startups, since you don’t have a value to multiply.
The pros of this method is that it gets its data from past acquisitions, so you know that someone is willing to pay that amount for a similar startup.
This method focuses around the question of: “how much money would I need to duplicate your startup?”. Basically if I started from scratch today, how much money would I need to invest in a similar company? This method revolves around the idea that investors wouldn’t pay more than what you would need to build another one from scratch.
To calculate all the assets of, for example, a software company you would sum all the proprietary software, the eventual patents and the cost of the developers that would need to work on the project, plus any other cost (such as UI and UX design).
Unfortunately this method doesn’t take into consideration all the “intangible assets” such as brand, potential for growth and competitiveness of the industry.
As I think you would agree, finding customers and getting known, is actually the hardest part of starting a business and this method completely ignores that part.
This method gets it’s name by it’s inventor Dave Berkus, an angel investor, and revolves around five different metrics:
And finally we have (to my opinion) the best method, the discounted cash flow, DCF for short. I like this method the most, because it is the only one that is based on actual numbers that can be checked and updated over time to provide a fair and comprehensive valuation for your startup.
The DCF method involves forecasting the cash flow that the startup will produce in the future and then “discounting” that cash flow to calculate how much it is worth. An higher discount rate is typically used for startups since they are an high risk investment.
The only problem with the DCF method is that it heavily depends on the forecast and on the assumptions that are made when creating the financial model, leaving the method very dependent on the analyst who makes the forecast (if only there was a better method… SPOILER, there is).
As you may have guessed it is extremely hard to value a company, especially a startup since they operate in unknown territory, but hopefully now you have a clearer understanding of the possible methods and maybe want to valuate your own startup, if yes, then stick to the end to find out if there is a better way to valuate your startup.
As I’ve hinted in the discounted cash flow method, the main problem with it, is that creating the financial forecast is the hardest part and is highly subject to errors if an assumptions (for instance churn rate) is wrong. This is the problem that we want to solve with Sturppy.
With our platform you can create a financial model for your startup in 5 easy steps that don’t require more than 15 minutes, meanwhile our AI will check if your assumptions are too optimistic or too pessimistic based on thousand of free startups data.
At the end you have a solid financial model that has accurate assumptions, do you see where we are going now? Now that you have a realistic financial model we automatically calculate your startup value with the discounted cash flow method based on the cash flow that you startup will generate. All in a single platform.
Discount rate
%
Monthly Cash Flow$ 15k
This is just a demo (xEBITDA = 10, 2 years projection). We made many assumptions and over-simplified a lot.
If you want a precise valuation just join Sturppy and get a valuation for free in less than 20 minutes.
Sturppy is so much more and can also help you get investors since you can just share with them the link to your financial model.
VC is a quantitative pre-revenue approach based on post-money valuation, which calculation involves dividing exit valuation by targeted ROI. Subsequently, the estimate of pre-money valuation is equal to the difference between post-money valuation and investment amount. You may apply any adjusting factors to get an accurate VC valuation.
RFS is a comparable analysis relying on a base value calculated by taking an average of similar startups in the market. Then, analysts consider the 12 common risk factors to adjust the result. This method is suitable for pre-revenue startups to value their worth in the market.
The scorecard approach is similar to the RFS, which also examines factors and metrics compared to another typical startup of the same size and stage in the market. What differentiates these two approaches is the set of factors employed for evaluation. Scorecard valuation is a popular approach utilized by angel investors for pre-revenue startups.
This valuation approach estimates your startup’s worth by analyzing the sale prices of other similar startups. You should look into the most recent transactions since older ones cannot represent the current market. The comparable transactions approach is an effective method for startup valuation, specifically when used with other techniques, such as the DCF.
Analysts also take advantage of qualitative and quantitative methods for startup valuation. The qualitative method includes assessing the money value, quality, and user satisfaction with a product or service. On the other hand, the quantitative method measures a startup's net worth or market capitalization. Both methods have pros and cons, which you may utilize simultaneously to value your startup.
This section investigates critical factors contributing to the valuation process of your company. Understanding the following concepts and indicators helps you value a startup at its actual market worth.
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If you would like to create the financial model for your startup and get an accurate valuation, you can create a free account now on Sturppy.
Good luck on your journey!
Depending on the financing stage, you can apply multiple methods and techniques to calculate your startup's value. Idea-stage startups usually rely on idea validation and market valuation. Pre-revenue startups employ comparable analysis to assess their value based on the market standard. Alternatively, you consider revenue and cash flow for valuing your startup as your business begins to bring in revenue.
It is challenging to put a reasonable and market-relevant value on your startup. Investors opt for other investment options if your startup valuation is too high compared to competitors in the market. Conversely, you may lose a lot of equity for undervaluing your worth. Therefore, a fair startup valuation lets you find the right investors and partners with appropriate investments and resources.
Depending on the financing stage, there are different methods to determine how much your startup is worth. You first need to validate your business ideas and value the market in terms of customers and demand. Next, you can consider customer acquisition costs, sales and marketing costs, and net income. As your startup earns revenue, assessing the cash flow and revenue is an ideal method to value your startup.
It varies depending on the nature of your startup, specific conditions, and the industry you operate in. The general aspects you should remember are product/service potential, the number of customers/users, and revenue.
Some factors for valuing your startup are the amount of investment and debt, company size, and technology. They are indispensable contributors to the value of your business.
