How do you value a startup?
From your point of view: Which valuation method is the most accurate for startup valuation?Which would you consider are the key drivers to value determination in a startup?
Valuing a startup is a complex process based on contextual factors affected heavily by market forces and how similar companies within your sector are currently being valued or their recent exits. Even with some traction to go on, the market still plays a substantial role in shaping the final valuation.
In case the startup company does not have any revenue or asset as on the date of valuation, the earnings and the assets approach becomes irrelevant, hence the only option is the market approach which one has to apply. No business operates in a vacuum. Every business has possibility that a similar business must be in existence. Hence the optimum method would be the market price method of valuation.
Start ups and projections - when considering a start up's potential for funding, I look at the company's projections and collaborating documentation such as contracts, purchase orders, even letters of interest. Community development funding programs also consider factors such as job creation when making funding decisions.
There are many methods of valuation - cash flow, asset, etc. It's simple really.. value is in the eye of the beholder aka buyer. We can come up with prices for listings or some arbitrary number for reports.
But until cash or other assets are exchanged, it's all academic. Most of the time it is very difficult to sell a business that is less than 3 yrs old. Yet, we've seen this "rule" broken like so many others in the business world.
Sure, historical data provide some basis for a valuation, but ultimately its true worth will be settled when the dust clears and the ink dries on a deal.
Might I ask. Are your interest in valuation or transaction price for start up. If you are truly interested in valuation. You can use any methods; such as discount cash flow, cost of acquisition, ...etc.. However, if you are interested in coming up a price for a start up investment. This is completely different mindset.
One method is to create a 'football field valuation' using valuation models relevant to the stage of the start-up. This will provide you with an overview of what the business could be worth, assuming that potential buyers model your business in the same way. However there will also be other less tangible factors that affect the valuation of a business in the real world, e.g. the number of parties interested in acquiring your business, that are less straight forward to work into a valuation.
Ultimately a purchaser should be looking to buy a business because they believe they would be a 'better owner' for the business than its present owners. Believing this creates the space for a deal to get done, since the company interested in buying the business perceives that they would be able to extract more value from the business than its present owners, which means they can offer a price for the business that is attractive to both them and the businesses existing owners.
As regards the key drivers of value, they are the same for a startup as any other business in my opinion; potential growth and potential return on capital. The challenge with startups is building plausible long term models for these key value drivers, since even small changes to assumptions about these variables will have a large impact on value. Such risks are generally accommodated by using discount factors, which can vary enormously depending on the buyer (VC/PE or Trade), the industry (techs are more risky than more tangible businesses), etc.
Good luck with your thesis.
Discounted Cashflow Valuation method, although a high risk factor has to be applied to the projected cash-flows because of the higher levels of uncertainty.
It's like real estate. It's only worth how much someone is willing to pay for it.
Many good comments here, but I will add one extra thought: value depends on the buyer. If you are talking to a competitor or similar firm hungry to buy their way into your business, they will pay a premium. If you are talking to a VC fund or investor that already has many investments in play, or worse yet, an investor who doesn't understand your business, they will find a way to offer a lower price.
1. Your business plan and concept.
4. Value your employees & or contractors.
A startup is the most important stage of a business. To have the right kind of address, the right kind of Corporation, toll free number, and on and on. If you do not know or want to make sure you have everything you need contact me.
To add to the other comments made here, it is important as well to use IP in the valuation of a company, as often there isn't much that can be used to value a start-up tangibly.
The value of startup is startup, but the main value in the strategic plan, is it managed carefully and professional?
Valuation for startups depends on the purpose of the valuation and the stage of the company. For 409A valuations (to value common stock for stock options in compliance with section 409A of the tax code), we use the market, income and asset approaches. For investment purposes (which is usually preferred stock), investors use a variety of methods (David Berkus method, Bill Payne method and the VC method). You may want to interview some angels and VCs for your thesis to get their input. I did a presentation recently for "Valuation for Startups". I'm happy to share my slides with you.
If the objective is raising money, the valuation of the start-up is only one aspect of the exercise and may well be regarded by Angel Investors or Venture Fund Managers as promises of anticipated future delivery. You might spend some time on analysing what the funding sources would regard as relevant in addition to a valuation based on projected revenues and/or activities. For example, the 3 primary questions to answer when seeking financial support - So what? Who cares? Why you?
Actual revenues + revenue potential. In Mexico startups are being valuated without real sales experience, which will tend to diminish interest in startups.
It's complicated, but not impossible. I know people that do it for a living, and I also have done it. Assuming that you are looking for an Income approach vs. a Cost Basis or Market Approach, here are some first steps:
First, the valuation should be placed into context. That is, the purpose of the valuation, and the value to whom?
Second, the type of enterprise that the startup will (hopefully) evolve into needs to be considered.
Third, consideration of technology factors. I prefer this approach, which parses out the influence of the technology over certain other beneficial factors, such as distribution, brand, multiple intellectual property and shelter-ability related questions, capital asset base, and goodwill, etc.
Competitive landscape, and Industry,
Fourth - industry - Fifth - leadership team... etc.
The steps go on, and end up in a discounted cash flow analysis. Let me know if you would like to discuss further. Jason
I do agree with Bernadette, it's almost impossible to value a start up, if it's a new industry on its own, the team and the leaders knowledge on what he's doing will set you at the right path to knowing whether it's got a potential be successful and continue to run with time
It is almost impossible, if at least, a waste of time to put a value on a startup, as there are to many factors involved.
Sure, you can do research and establish comps against the industry, trends, etc... but then it comes down to whether the capital, team, and management is there to make it a reality.
I would also want to understand why you are needing to put a value on it - are you trying to raise money, go for a loan, etc... as many of them will tell you the same thing. Which is why it can be so difficult for new businesses to raise money or loans.