Startup Valuation is both an art and a science. Established businesses with years of financial history, startups operate with limited revenue, unpredictable growth and intangible assets like intellectual property.
Thus traditional valuation methods do not always apply. Professional valuation experts use several startup valuation methods to determine the startup's worth- especially in the early stages from seed funding to Series A and beyond.
1. Seed Stage: At this stage, the startup venture lacks significant revenue or traction. The valuation is based on potential instead of performance. The common seed stage valuation techniques are –
a. Berkus Method: In the Berkus Method for Startup valuation approach, the valuation specialists assign value to the key elements like idea, prototype and quality of the founding team, strategic relations and market potential.
b. Score Card Method: In the Score Card valuation method the comparison of the startup is made to other similar startups in the region and industry, using benchmarks like product, team, market size and competitive environment. The valuation experts based on this method adjust the standard pre-money valuation up or down according to the startup scores.
c. Venture Capital Method: Investors use this method to estimate a potential exit value and work backwards to determine the present value according to the expected return.
Series A: Early Traction and Growth: At Series A Startup Valuation, startups typically have some customers, revenue and product-market fit, the valuation is influenced by both qualitative and quantitative factors. The most common valuation techniques are –
a. Discounted Cash Flow: This method the professional projects future cash flows and discounts them to present value using a high-risk adjusted discount rate.
b. Comparable Company Analysis: Here the investors compare the startup with similar companies that have been recently funded or exited. Multiples based on revenue, users, or even Gross Merchandise Value help ascertain fair valuation.
c. Cost-to-duplicate method: This method is occasionally used. It calculates how much it would cost to rebuild the company from scratch. It covers technology, development, hiring and market research costs.
Series B and Beyond: As startups scale up, their data and revenue become more reliable. The traditional startup valuation metrics used for mature businesses gain relevance. The techniques include-
a. Revenue Multiples: The valuations hinge on forward-looking revenue multiples according to industry, growth rate and profit margins.
b. Earnings-Based Valuations: For profitable or nearly profitable startups, the valuation may also consider Earnings Before Interest Tax, depreciation amortization or net income as the basis.
Startup valuations evolve with the journey of business. The startup owners must understand these valuation methods to negotiate effectively, set realistic funding goals and align with the investor expectations.
When seeking business valuation for service-based businesses and other startups, it is advisable to work with a professional service provider who will adopt the right valuation approach at the right stage, paving the way for smarter growth of your startup venture and ensuring apt funding decisions.