In the competitive entrepreneurship world today, entrepreneurs are quite excited about adding value to their startups. It is one of the most essential things to do for founders as it helps in further equity and funding decisions. Quantifying the worth of a startup is the most complex task to do. There are several methodologies and approaches to determine the valuation of your startup. The worth of a startup depends on several factors:
- The business idea of the Startup
- Stage of the startup
- Product Prototype
- Market risks and competition
- Technical Adaptability
- Customer traction
Let's know about the approaches used by startup founders and entrepreneurs on how to calculate the valuation of your startup.
Mehul Sharma - Founder & CEO, Signum Hotels & Resorts
Pre-revenue start-up valuation may be a complicated endeavour. There are many factors to take into consideration, from the control group and marketplace traits to the call for the product and the advertising dangers involved. And a hard truth associated is that even after comparing everything, despite the only pre-revenue valuation formula, the first level you may get continues to be simply an ESTIMATE!
The world of the start-up is a place full of enthusiasts. A start-up is initiated every 3 seconds around the world! Every big company you can think of started from a garage with a computer bought with savings money or some sort of gift. But not all start-ups share the same start.
Business proprietors will wish for an excessive valuation, while pre-revenue investors might opt for a lower price that guarantees a larger go back on investment (ROI).
So, how does pre-revenue start-up valuation evaluate with a mature commercial enterprise valuation?
Unlike early-stage start-ups, a mature publicly-indexed commercial enterprise will have extra information and figures to head on. Regular circulation of sales and monetary statistics make it less difficult to calculate the price of the commercial enterprise. More often than not, early-stage startups are valued somewhere within the middle, which means founders don’t get quite the amount they anticipated, and investors pay higher than what they intended to invest.
For most start-ups especially pre-revenue, Traction is one of the significant indicators for assessing the worth. The true story of a start-up can be brought into the daylight by taking a look at its effectiveness in the market, the number of users, and its growth rate.
Estimating the actual worth of an unlisted startup before the seed funding is actually of equal importance to having a business idea while going in.
There are various ways to estimate the current worth of a business, but only a few are used as a daily pill by entrepreneurs.
The most basic method to assess the value is by analyzing the previous year's Balance sheet. Under this method, the total debt and liabilities are subtracted from the aggregate value of assets owned by the business. This method is less complicated, easy to assess, and comes in handy.
Although, the Balance sheet method does not provide the whole picture of the situation. The problem here is that this methodology considers the start-up in its current state and not how it'll be in the future. Investors are inquisitive about the latter, and so, as an asset-based valuation doesn’t take that into account, this method has its drawbacks.
Another method of assessing the valuation of a business is by calculating the EPS (Earnings Per Share). EPS is calculated by subtracting the Preferred dividends from the Net income and further dividing it by the average of outstanding common shares. For an individual investor, EPS shows the exact value of revenues and makes more sense.
The valuation of a start-up is a complex task and there is no straight jacket solution or method to be put into use each time. Often, the valuation is calculated using a combination of ratios, and ordinal values.
The angel capitalist Dave Berkus believes investors ought to be ready to envision the corporate breaking of $20M in 5 years. His technique assesses five important aspects of a start-up, namely, Concept, Prototype, Quality Management, Connections, and Launch plan. The Berkus technique is an easy estimation, typically used for IT start-ups. It is a good way to gauge value, however, because the market into account isn’t taken into account, it's not going to provide the scope that some folks desire.
Furthermore, a few more methods like EDITBA (Earnings before interest, taxes, depreciation, and amortization), top-line method, and GMV (Gross Merchandise Value) have been proven to provide significance for the estimations.
EDITBA is another easy-to-use method that provides ordinal values by using the previous financial statements. Varied business segments face varied rates of tax payment based on the industry they fall into. A business with a higher revenue may have an NPV (Net Present Value) lower than the one with lesser revenues due to the different industries they fall into.
Another interesting method for assessing the value is the Top Line method, which is a reference to gross figures reported by a company, such as sales or revenue. This method gets the name because these are shown at the top of a company’s income statement and are kept aside for the reporting of revenue and or gross sales.
GMV method ascertains the gross value of sales in the market. Under this, the gross value of the merchandise is calculated as the Sales price of goods with the number of goods sold. It shall be noticed that GMV is calculated in conjunction with net sales, which takes deductions into account.
The first-time valuation of a start-up is bound to foresee at least a few mistakes. Hence, while evaluating the value of your start-up two big pitfalls one shall avoid are:
1. Never assume a valuation is Permanent, i.e., after all, a startup is going to be valued at what investors are willing to speculate in it. Ultimately, it shall be kept in mind that the variables are at play, and perceive that no valuation, high or low, is ever permanent- or maybe even correct with certainty.
2. A Valuation is never straightforward, i.e., even after getting a pre-revenue start-up valuation you're happy with, it’s best to debate things in nice detail with potential investors simply to ascertain that everyone is on the same page regarding the way to proceed.
It is rightly said that only a fool would make peace with the first valuation he gets of his business as there are complexities and human factors involved.
Vicky Jain - Founder, uKnowva
Startup valuation is not an exact science. Factors can include the industry, the present market, the team’s credentials, and other forces that might be taken into account. The valuation of a start-up is the measure of how much investors think the company is worth right now. One of the simplest ways to measure the value of a startup is with the scorecard method. By weighing up parameters of success like team experience, competition, the strength of the product, etc.) subjectively, this method enables comparisons between a startup and other “average” startups within the industry and area. If the startup looks to have more than average qualities as per the calculations, then the chances of getting a higher valuation increases and so does the investment opportunity. There is another method known as the discounted cash flow method that approximates how much flow of cash a startup will produce over a long period of the term. By predicting this and calculating the expected return on the rate of investment, assumptions can be made about a start-up's value.
Sharan Goyal - Founder and Director, Crozzo
Valuation in today's day and age has taken a very sinister meaning. Valuations are through the roof, with no stopping in sight. I prefer to find a reasonable multiple of EBITDA or revenue (in the case of a cash flow negative company) and compare that to that of an existing business which has raised funds at a particular multiple. For example, a D2C business in the food space with a solid distribution network is often valued at 15-20 times forward revenue. It would be fair to assume that a company with a similar profile can be valued at a similar multiple.
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