Startup founders often struggle with the looming question of valuation, especially during the early stages. For pre-profitable companies or even pre-cashflow ventures, the situation becomes all the more sticky as grasping a concrete method to devise the valuation becomes difficult. If you are among the many entrepreneurs having trouble gauging their new company's value, let us help you.
To begin, startup valuations reveal the extent to which a business will be able to employ the additional funding to grow, satisfy client and investor needs, and reach the next level of success. However, as an early startup, you can think of 'valuation' as something that transcends the traditional startup resources pertaining to money and finances. Therefore, a startup's valuation may consider your team's backgrounds, assets, goods, business model, competition's results, market potential, goodwill, etc. Now that we know the basics of startup valuation, let us look at how to come at a particular value during the initial stages of your company's take-off.
A BEGINNER'S GUIDE TO STARTUP VALUATION – TOP SEVEN EASY STRATEGIES
Standard Earnings Multiple Method – It is a simple method wherein startup valuation reflects as a standard earnings multiple, with additional considerations being attributed to recurring revenue models. If you're a technical co-founder of a startup, you can use this tactic to learn more about free cash flow, which is a key indicator of a company's value to a potential buyer.. In the current market, the multiple usually ranges between 5 to 8 times the average profits of the past three years, but in the SaaS business, the range is 8-to 12 x brackets.
The Berkus Approach – Devised by American venture capitalist and angel investor Dave Berkus, the eponymous Berkus approach is a way to evaluate startup value by focusing on five essential parameters of success –
- Basic value
- Strategic partnerships in its primary market
- Production and subsequent sales
We may evaluate the startup's value by calculating the contribution of each of the aforementioned factors to the company's total value.
Human Capital plus Market Value Method – Figuring out startup valuation is quite a challenging task during the initial stages of investment as the startup resources are minimal and the tangibility-intangibility assets ratio is subpar. Thus, what you can do as a pre-revenue or pre-cashflow startup founder is to bank on ideas, innovations, know-how, and the human prowess and competency of your team. In addition, the method has ancillary benefits as it allows you to peep into your team's expertise and assess the people who will develop the projects in a timely fashion. Likewise, you can also perform an entirely mathematical evaluation premised on the obtainable market value.
Discounted Cash Flow Method – Highly revered by professional analysis, the Discounted Cash Flow Method of startup evaluation takes into the following aspects –
- The estimation of the total market for the startup's products or services and their expected revenue growth
- Forecast of market share acquisition across a timeline
- • Cash flow forecasting by calculating startup's fixed and variable costs and anticipated working capital and capital expenditure requirements.
With the abovementioned forecasts, you can take into account a reasonably optimistic outlook on your startup valuation. However, the catch is that as 90 percent of startups fail, and those that survive do so through the skin of their teeth, a discount rate is applied to the forecasts for the inherent risks. The Discounted Cash Flow method helps technical co-founders of companies to have meaningful conversations with investors and steer communications toward assumptions that drive real value.
The Scorecard Valuation Method – It is one of the most common strategies that angel investors co-opt to evaluate a startup's worth. Also known as the Bill Payne valuation approach, the Scorecard Method entails comparing your firms to other similar ones that have already received funding and adequate startup resources from external agencies. You have to begin by calculating the typical pre-revenue company valuation in the market segment and then analyze your firm vis-à-vis others in the same region by gauging the following factors –
- The management team's strength
- Market size
- Traction and revenues expected in the short run
- Product technology in a competitive environment
- Channels of marketing or sales or partnerships
- Additional investment needed
Customer-Based Corporate Valuation Method – Although it is an upcoming and rather new methodology, the customer-method valuation tactic is highly diagnostic, accurate, and incorporates the most crucial determinants of a firm's worth. By considering highly relevant factors, such as customer acquisition, retention, and monetization, the method values a business by using sophisticated predictive customer analysis to uncover how well a firm is roping in new clients and retaining and monetizing customers. Then, the information is plugged into a standard discounted cash flow valuation model to estimate the overall startup worth.
Venture Capital (VC) Method – Popularized by professor of Harvard Business School Bill Sahlman, the VC method of startup evaluation includes a two-step technique wherein you have to use a number of pre-money valuation algorithms. First, you must gauge your business's terminal value in the harvest year. To calculate the pre-money valuation, you must first establish the expected return on investment and the total amount of capital to be invested. For example, the year in which the investor leaves the company is known as the harvest year. In addition, the terminal value of your startup is its approximate value at some point in the future.
WRAPPING IT UP
There is an array of ways by which you can evaluate your startup's worth. The methods are distinct, with a slight change in perspective. However, many of the methods consider both human and monetary elements to arrive at a specific number. Lastly, as a startup founder, you also have to consider its post-evaluation growth, which you can achieve through marketing. An excellent social media presence, a high-performance website, and excellent customer support are ways to add value to your startup. Thus, find web developers for startups to rise to the top of the ladder.