Valuing a business is a tricky task. And when startup valuation is required, it becomes a more challenging task. The reason behind this is that without any financials and past income and expenditure sheets of a company, it is uncertain about the performance of the business. However, if the valuation of a startup is done correctly, a promising startup can reap multiple benefits to the investors in the future. In this article, we will be discussing various effective methods of valuing a startup.
This is the most common method of valuation followed by venture investors. In this market, multiple methods, recent acquisitions on the market by similar nature of startups is taken and a base multiple is decided on the basis of the value of recent acquisitions. This gives the base market multiple on the basis of which startup valuation is conducted. This valuation technique provides a fair idea to the investors regarding what the market is willing to pay for a company. However, not all startups have similar comparatives and thus it can be very tricky for the investors to value the business on the basis of this technique.
The motive behind this method is to ascertain how much cost will it take to build a similar startup from the scratch. To determine the fair market value of the business, the cost to duplicate method looks at the physical assets of the company. The idea behind this is not to invest more than what it costs in the company. Many investors follow this method of startup valuation in Mumbai and Gurugram. However, this method also holds few drawbacks. This includes not the inclusion of intangible assets in cost and also not considering the future potential of sales and growth of the company.
This method relies on projecting future cash flows of the business using an expected rate of investment return, also known as the ‘discount rate’. The forecast of future cash flows is made and then the discount rate is applied to the accounting the risks associated with them. Generally, higher discount rates are applied to startups as there are higher risks involved in new business. The only limitation of this technique of startup valuation is that the valuation is highly dependent on the ability of the analyst to forecast accurately about the market conditions and making correct assumptions about the future growth rates. This requires high proficiency and expertise, as there is a lot at stake here.
This method was created by Dave Berkus, an American angel investor, and venture capitalist. It promotes valuing a startup on five major assessment factors including Basic Value, Technology, Execution, Strategic relationships in a core market, and Production & consequent sales. The total value of the startup is calculated post extensive assessment on these five key success factors. The numbers obtained from the process decide the final value in this startup valuation process.
The Risk factor Summation Approach values a startup by taking into the quantitative assessment of all risks related to the business which will have an effect on the return on investment. under the risk factor summation methodology, an initial price is calculated for the startup using any of mentioned strategies in this article. To this initial price, the effect, whether positive or negative, of various kinds of business risks are taken under consideration, and an estimate is subtracted or added to the initial price based on the result of the risk.
After taking into consideration all types of risk and implementing the ‘risk factor summation’ to the initial final price of the startup, the ultimate price of the startup is decided. Some kinds of business risks that are taken under consideration are managing risk, political risk, manufacturing risk, investment and capital accumulation risk, technological risk, market competition risk, and legal environment risk. This technique is followed by various investment firms that do startup valuation in Gurgaon.
In this technique, customer acquisition, retention, and monetization are taken into account to determine the value of the business. Information is collected that how well the company is managing its customers and then applied in standard discounted cash flow valuation technique to determine the overall value of the startup. This customer-centric approach is a modern take on the traditional methods of startup valuation.
There are endless techniques to ascertain the value of the business, however, it is up to the analytical skills of the investor as to what technique needs to be applied in what situation and to what kind of business model. The best technique is the one that takes both financial and human elements into consideration and can determine the closest to an accurate value of the business.
Resurgent India is a leading corporate finance advisory that deals in startup valuation in Gurugram and Mumbai. It holds a panel of financial experts who are well aware of the market trends and offer the best tailor-made solutions for their customers.