Start-up valuation is a term given to a start-up to calculate its worth. This is an important process because when an investor shows an interest in funding, he/she will have the very first concern of equity valuation that will be involved if they are willing to invest in the company. Not just them, it is beneficial for the entrepreneur as he can then have an idea about their start-up's capability to perform!
Methods:
1. Cost-To-Duplicate
In this, investors seek the cost of duplicating that particular product. This way, they get an idea of the valuation of shares if they are interested in investing. For example, for an android application, they would calculate the cost to develop the same application. For some medical devices, they would look for the elements used in them and calculate their cost to know the final cost of making that product. This way, they will also figure out the valuation of business interests. There is one disadvantage: it restricts the company's capability to generate profits and return on investment. Also, it doesn't cover intangible assets which belong to the company like brand value, the company's relationships, it's intellectual capital which is the actual foundation of a company.
2. Market Multiple –
This tells an investor how the market will treat the company! There is always an opponent present in the market to compete with a start-up. The kind of trend going on at present acts like a push or a pull for the investor. In short, he can have an idea about the business Valuation of that particular company. A survey should be done to analyze the company's sales and profits if their product reaches the final stage of operation. Investors will be inclined only if they believe in the product in the business model before generating revenues. It helps the entrepreneur to calculate the valuation of equity shares.
Though, this proves to be unfair in the world of start-ups because there is never a comparable market present for a start-up. Also, the initial deals of a company are not that publicized.
3. Discounted Cash Flow
This is one of the Modern methods of Business valuation and is used for those start-ups that haven't earned anything! It's a kind of analysis that gives a very important business valuation service by forecasting how the company will perform in the future by using an expected rate of investment return and then calculating the worth of its cash flow. The problem with DCF is that it’s dependent on the analyst’s potential to forecast future market conditions and make assumptions on long-term growth rates.
4. Valuation by Stage
This is used by Angel Investors and Capital Firms at development stage valuation. It provides a valuation service set by the investors based on the commercial development of the start-up. It depends on the growth of the company and how its shares are going to be distributed. Some firms acting like Valuation Advisory Services believe in giving additional funding when the company reaches a goal.
5. Standards Earnings Multiple Method
This method is used considering the recurring revenue models. This tells about free cash flow and how metrics will work on incremental value to a purchaser.
Some factors required to consider in this method are previous debt incurred or funding rounds and intellectual capital of the product or service. Companies that have a patent or proprietary technology can grow tremendously without profit being on the books.
6. Human Capital Plus Market Value Method
This is one of the valuation services in India, which is followed by an investor who uses this method, interacts with the team first and knows about their expertise, then calculates the valuation based on the obtainable market volume. As the investor gets to know the rough estimations, he can then predict the start-up's potential.
7. 5x Your Raise Method
An investor using this method is looking for the stake of the money that he is investing. So, the start-up’s be five times the amount that is being raised!
This can also create a problem in the future as one goes to raise for the next rounds.
8. The Exit Method
This method is control-based; it tells you about the valuation required to have enough stake on the exit. A model cap table is made with the main stages that the business should go through. This becomes a tool for sensitivity analysis to check valuation and other terms if accepted at early rounds to have a good exit.
9. Customer-Based Corporate Valuation Method
This method incorporates determinants of corporate valuation-customer acquisition, retention and monetization directly to the valuation model. It values a business as it uses customer analytics to find how a company is getting new customers and transfers this data into a standard discounted cash flow valuation model to calculate a company's overall income.
