What is the best way to value a start up?
What is the multiplier being used on gross revenue for Ecommerce companies to help me find the best way to value a start up. I.e. if a company is generating a gross revenue of $50,000, then what would you value the company at? (Please note: this is not the net revenue but the gross revenue; the money the customer's pay, which does not include expenses).
Hi and Good day
Tricky question you got here, Ecommerce and the gross revenues mentioned, both!!
On valuation, the golden rule is value of buyer's perception on sellers business, and it can be any number - but we try to bring in models to arrive at a range which is palatable to both sides, like EBITDA multiple, Turnover based valuation, Users/ Clients based valuations, combination of these and so on.
For a Ecommerce business with USD 50k in gross revenues, think this business can look at a stage level funding for growth as they have a long way to go. Before valuation for ecommerce, please check with levels of penetration in the market. Total number of transactions every year through the portal divided by total number of transactions happening physically or any form of offline. If this levels are less than one twentieth of a percentage - you are just started and on the evolving path which is the longest and toughest part of this kind of business. Until you reach a 2% to 5% penetration or in the projection based on a linear trend, your valuation will purely depend on
1. The business model, how good is this portal to transact than any other option easily available from a consumer perspective
2. The people who are part and parcel of the business and their experience, expertise, knowledge etc.
3. The ratios like servicing costs per customer, lead times per transaction, burn rates, scale up of transactions across region, product groups, seasonal and is the revenue per transaction going north including number of transactions (a correlated measure)
4. How good is the logistics, distribution and customer service? How many customers come back to you every time there is a need? This is an important measure as this will bring you new customers slowly but effectively
5. How is your operations poised for growth and scale? In ecommerce you need to show that by incrementally increasing operating resources/ technology/ assets - you must be able to handle 50X transactions with perfect service levels.
Now you yourself, put a number across the above points and evaluate and see where you stand, you may have different weightages and that's fine - then compare with the best in class out there. You are ready to evaluate the business.
All the very best and please connect for further requirements
Great question! Please visit our site at exodus1.com, and click thru to "Business Valuations." So far, the answers I've seen have been pretty sound. Our valuations are certified by NACVA. We help firms put together SBA financing packages. Ping me with further questions, and keep up the good work out there!
Just a pregnant lady, you can't tell whether she going to give birth for a boy or a girl at early stage; and after she gives birth, you also not able to tell whether the child is intelligent or not, not until few years later ...and so on.
Likewise, you can't really value a startup well as it is too early to tell. PE, DVM, DCF, Arbitration, Net Profit ...you can name it, but non of it will be useful at this stage.
At this stage, it solely depend whether people believe in your idea or not, the more believers the higher chance to justify your claim value. Having said that you must perform the following so as to direct you in building go value company:
1.Cash flow report - past and work on forecast - cash is blood
2. Financial model to model sales to gross profit
3. Understand your potential of your business and your overhead structure & costs to obtain you potential.
4. Understand what you going to do to achieve your potential and how much will be incurred
5. When can you build the first business model that can make money or break-even
6. Keeping visualize to check on your idea - if you don't like your idea or don't feel the idea is super, how can you convince others?
There is no single answer to your question, so I guess the answer is...it all depends. First most valuations are done on EBDITA, not simple revenue projections...one must project costs too. The most accurate valuations are based on the net present value of some set of future cash flows (typically at least 5 years). There are valuation methodologies that use gross revenue, but in my opinion they are flawed. So someone may give you an answer. However, even if they do, the potential size of the company, the market in which it is trying to play (competition), and several other variables go into an investor's selection of a multiple to use in valuation of a business. So the real answer remains...it depends. The best someone can do is give you a range of numbers without more information. And what good is a range? The difference between 2 and 3 is huge, so saying 2-5 really does you no good.
The current view is a gross multiple of x4 or gross revenue, ie invoiced sales [before deducting cost of sale] is a good measure.
I agree with Jacob - his answer is spot on. Without a real sales history, the team and IP are way more valuable than an idea or projections to an angel. If your buyer is more likely a big company that will assume operations, its the IP they want, and perhaps some of the team if required.
I have bought and sold companies for 15 years, many of which are web-based, and here are my thoughts:
1. Nearly all valuation techniques are based on revenue or cash flow. This includes either historical, current or future cash flows, or revenues. Absent current revenues, then you must make projections.
2. Projections are heavily discounted. Without current revenue, your company's value is primarily based on the experience of your team, it's idea and any IP associated with the company.
3. Multiples for E-Commerce companies varied WILDLY depending on if the product or service is a commodity or proprietary, and how scalable the business model is. Multiples of EBITDA range from 2 (for a commodity) to more than 10+ for highly scalable business models.
4. It is far too hard to generalize regarding multiples in this industry. You need to talk specifics. In other established industries, multiples are fairly consistent. With E-Commerce companies, multiples of both revenues and cash flow vary greatly (as much as 100x).
1. Is your gross revenue figure of $50k an annual or monthly figure?
2. What is the product or service?
3. Please provide a brief bio of the founding team and any IP.
4. Where is the company located and who would the likely buyer be?
5. Can the company be relocated to another geographic market?
6. Is the founding team staying with the company after the sale?
7. What is the purpose of the valuation? Outright sale, raising equity or debt financing, etc? FYI - The valuation will vary depending on the purpose.
8. What country is the company located in? I see you are located in Bangalore, India.
Assuming you own https://www.fyne.in/ - My questions and comments would be:
1. Do you have any proprietary vendor/manufacturer relationships?
2. Do you carry any inventory? How is the business model monetized?
3. You have a ".in" domain name. That will be difficult to sell in the USA to most buyers.
Without your answers, I guess your company is worth in the range of $100-300k. It could be worth significantly less or more depending on your answers to the questions above. If your company is located in India, then I have no idea. I lived in Southeast Asia previously and the M&A markets are highly fragmented and there is very limited data.
Very difficult to judge with this small s sampling...I would need to know your mission and vision statement, see your business plan and then go from there on a face to face meeting with you,,,,,
You need a business appraiser who is experienced in the world of PE, VC, & Angels. In short, you will need to do projections to show that you have thought things through, but no investor is going to believe the projections. Likewise, historical revenue for a startup will not be the basis for a valuation. Startup funding is all about exits.
If, as you said in your earlier response to Madhu, you are not looking at VC yet, your best bet is to bootstrap as much as possible and not worry about the valuation. Create the best product/service, a quality company, and get (the right) people interested in your success. Startups are increasingly sophisticated and further along before they reach rounds A & B. There are more startups than ever before, but series B financing has not increased in step; hence, the "Series B Crunch."
$ 50,000 a year or $ 50,000 a month? Considering the high failure rates of new businesses the value of a start up business in many cases would be what the computers and assets would bring at auction. This would be even more true if it is a personal services business. Now if it is a unique business with a potential for dynamic growth and patents protecting the intellectual property then it could be a different story and the answer could be 10, 100 or 1000 times sales.