Startup valuation is vital for investor fundraising and proper projection for the selling price of your business equities. At the initial stages of running your business, you may not have sufficient capital for daily company operations, procuring goods and services or paying your team. However, you can solve this problem and make your business sustainable by performing an accurate startup valuation. With a good valuation, you can approach venture capital (VC) firms and angel investors or submit your proposal to business incubators. These institutions will provide you with the capital required to run and sustain your venture in the future. Your startup valuation should provide a clear insight into how best you will use the funding appropriately, grow and sustain your business, and meet your investors’ requirements.
The method was established by an American angel investor Dave Berkus. The Berkus method uses qualitative and quantitative elements to assign specific amounts to each startup’s progress. When using this method, you consider the following elements:
When performing startup valuation using this method, conduct comprehensive tests on the five elements to accurately determine the value of your venture.
It provides both pre and post-money value of your business by estimating your expected capital and terminal value returns. The terminal value projects your business value at a future date. When conducting startup valuation using this method, you need the following pre-money calculations:
Consider the price to earnings ratio (P/E) in your calculations. The ratio projects your business share price compared to the prevailing per-share earnings. When calculating the business terminal value, you need:
The formula for calculating the terminal value:
When computing your second pre-money business valuation, consider the following:
When computing the pre-money valuation, use the following formula:
Venture capital investors mostly prefer this valuation method. It provides a clear projection of the startup’s value in the market. When calculating the startup valuation of your venture using this method, use the data from the acquisition of a similar business as yours in the industry. The process involves forecasting the potential growth of your business and the projection of the assets and profits as the business matures. Venture capital investors are willing to finance a business if the market multiple indicates that it will generate assets and profits. A challenge associated with this method is how to find past business transactions of a similar business in an industry within your locality.
When using the discounted cash flow method, the valuation of a startup is determined by estimating the future cash flow amount. If you want the present value of your startup, compute the discount rate value from the rate of Return on Investment (ROI). When you add all the discounted cash flows, you will get the true value of the startup valuation of your venture. However, this method uses market assumptions and is not commonly preferred by business startup analysts. It mostly depends on the analysts’ knowledge and experience in predicting the performance of startup ventures based on the current market conditions.
The method provides the valuation of a startup by considering the market risks that might affect the business’s Return on Investment (ROI). It involves two steps of startup valuation. At first, a startup analyst uses any of the valuation methods. After coming up with a business valuation, an analyst then adjusts the valuation by considering all the market potential risks.