STARTUP VALUATION AND METHODS

Startup Valuation

Every startup would need huge seed capital and funds to fuel the different stages of their growth. And just the greatness of their idea or the genuineness of their success won’t lure out the investors. Though all these factors are vital, it is eventually the valuation of a certain startup that attracts the investors and venture capitalists to invest in them.

Henceforth, it becomes vital to rightly forecast their worth because anything less or more would leave a serious dent in their path of growth.

 

The Most Popular Startup Valuation Methods

There are many diverse methods used in deciding on a startup’s valuation, while all of them differ in some way, they are all good to use.

• Discounted Cash Flow Method
• Cost-to-Duplicate Method
• Venture Capital Method
• Risk Factor Summation Method
• Valuation By Stage Method
• Comparables Method
• The Book Value Method
• First Chicago Method
• Berkus Method
• Scorecard Valuation Method

 

Let us see some most popular method of in detail:-

Discounted Cash Flow (DCF) Method

This method includes predicting how much cash flow the company will produce, and then calculating how much that cash flow is worth against a predictable rate of investment return. A higher discount rate is then applied to startups to show the high risk that the company will fail as it’s just starting out.

This method depend on a market analyst’s ability to make good assumptions about long term growth which for numerous startups becomes a guessing game after a couple of years.

 

Berkus Method

First on our list will be the Berkus approach, which is otherwise recognized as the “stage development method or the development stage valuation method”. This method uses five key metrics for making the right calculation concerning the worth of the startup. Those metrics comprise:

• Basic Value
• Technology
• Execution
• Strategic relationships in the core market
• Production and consequent sales

Though the Berkus Method is seen as a significant method utilized by many startups, it fails to take into consideration a lot of other features of startup life. Nevertheless, for a startup that is in the initial stage of its life with no revenue generation, this might be an ideal way to arrive at the valuation.

 

Cost-to-Duplicate Approach

This is one more popular method. Through this, a startup owner would compute the expenditures which will be incurred to recreate the complete business. For this, all the physical assets, spending for research and development and any other expenditures that have been incurred in the process will be comprised.

 

Venture Capital Method

This is alternative popular method utilized by a lot of venture capital firms. To compute the value of the firm, individual will essential to derive the terminal value or the value at which individual will be selling the business and the Return on Investment. Plugging in these values to the formulas will aid individual arrive at the solution. The formulas for the same are as follows:

ROI = Terminal Value / Post Money Valuation

Pre-money Valuation = Post-money Valuation – Invested Capital

 

The aforementioned methods are the most prominently used and are popular among Indian startups. The valuation of a startup is important in establishing it in the competitive market. Henceforth, it also becomes vital for the common people to know how these small companies are valued at such high amounts.