Need of Valuation for Startups
- Startup companies need to receive various types of funding in order to rapidly develop a business from their initial business model that they can grow and build up.
- Startup valuation methods are the ways in which a startup business owner can work out the value of their company. These methods are important because more often than not startups are at a pre-revenue stage in their life-span so there aren’t any hard facts or revenue figures to base the value of the business on.
- Because of this guesswork, an estimation has be to be used, which is why several startup valuation method frameworks have been invented to help a startup business more accurately guess their valuation.
- Business owners want the value to be as high as possible, whilst investors want the value to be low enough that they’ll see a big return on their investment and thus, the need of fair valuation methods arises.
Valuation of a Startup differs from the Valuation of a Matured Entity
- Startup businesses will usually have little or no revenue or profits and are still in a stage of instability.It is likely that their product, rocedure or service has just reached the market.Because of this it can be difficult to place a valuation on the company.
- With mature publicly listed business that received steady revenusand earnings, it is a lot eaiser. There are severals traditional methods to value a Matured entity like, Net Asset Value Method(NAV), Profit Earning Capacity Methods(PECV), PE Multiple Method, Discounted Cash Flow Method(DCF), etc.
However, with startup valuations there is no substantial information to base a valuation other than assumptions and educated guesses.
Why are Startup Valuation Methods Important
- When an early stage investor is trying to decide if they should make an investment into a startup he will guess what the likely exit size will be for that startup of a type, and in a specific industry. If a business owner has used methods to show their startup is worth a high amount that investor is likely to invest more into the company.
- Using these methods or frameworks is also important because startup companies lack reliable past performance and predictable future performance that most established businesses use to estimate their value so having a way to guess a valuation is useful, even if it is all guesswork and predictions.
- Ideally, a business owner should use several startup valuation methods to get the most accurate valuation possible. A business owner will want all of the valuations they come to from each of the methods to be within a sensible average.
Things to Consider When Choosing a Startup Valuation Method
- Knowledge of other businesses in an industry and geographical location and what they are valued at is key to figuring out the value of a startup in the same industry and location, which is why several of the startup valuation methods include this.
- A business owner should not stop with one approach. Angel investors and business owners will want to use several methods because no single method is useful all of the time. Multiple methods also help a startup determine an average valuation.
- Finding this average valuation is important because none of the startup valuation methods are scientifically or mathematically accurate, they are all based on predictions and guesswork.
Venture Capital Method
Scorecard Valuation Method
Risk Factor Summation Method
Discounted Cash Flow Method
Valuation By Stage Method
The Book Value Method
First Chicago Method
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