Valuation for startups expanding to US

The overall investment in startups worldwide in 2023 was $285 billion, down 38% from $462 billion the previous year. Globally, there were large reductions in financing at every level.In Q4 2023 ,the valuations for seed stage at $13.9M,series A at $45.5M,and series B are $103M.

Startups who want to take advantage of the great potential in the American market need to understand and adhere to the valuation viewpoint. This isn’t simply a routine process; it’s an important milestone that might determine their fate.

Investors fear early-stage companies because of economic, geopolitical, and competitive concerns. To thrive in the cutthroat American market, companies venturing there need to be well-versed in valuation details. This post will provide a detailed understanding of valuations for startups expanding to the US.

Startup valuation in the US

In the United States, determining the value of a startup is a complex procedure that varies substantially at each stage of development. It is critical to determine a valuation that accurately reflects the venture’s present state and prospects to facilitate strategic planning, seek investment, and navigate through funding rounds.

Understand startup valuation in the US

Considering industry conventions and investor expectations, valuation for startups expanding to the US offers funding and strategic connections. Startup valuation in US have experienced fluctuations across different stages.

In early 2023 ,the startup landscape saw a decrease in valuations across various stages, except for growth stages of companies. Pre seed valuation peaked in Q3 2019 and Q2 2022, tapered off to $4.0M by Q1 in 2023, this shows a caution from investors towards early stage startups. In Q1, 2023, pre money valuations for venture growth stage companies fell to a median of 90$M, showing a significant decline from the highest record in 2021.

Despite a drop in US startup funding by nearly 30% in 2023 compared to 2022, AI startups attracted significant investments. There where instances that startups raised funding at lower valuations than previous rounds increased from 8% in 2022 to 20% in 2023, showing a wide reset of valuations among late stage companies.

Between 2008 and 2014, most startups changed their focus before securing Series A investment. Several IT businesses from Europe and Israel have effectively expanded into the US market, which shows that this sector has a lot of room to develop and make money.

Startup valuation methods for companies expanding to the US

Businesses must appropriately value their firm when they expand to the US to attract investors, determine ownership holdings, and plan expansion. We’ll take a closer look at approaches to startup valuation in the US here.

Cost-to-Duplicate Approach

A cost-to-duplicate approach can be used to determine how much it would cost to create a replica of an existing asset for a startup. It comprises physical assets, such as machinery, and intangible assets, such as ideas and the money spent on creating new software. Although simple, it frequently disregards emerging businesses’ potential and market needs, which leads to an undervaluing of startups.

Discounted Cash Flow (DCF) Analysis

DCF analysis anticipates the startup’s future cash flows and reduces them to their present value using a discount rate representing investment risk. Startups with clearly defined revenue streams are better suited to this approach because it is very sensitive to assumptions regarding future cash flows and the selected discount rate.

Venture Capital (VC) Method

Venture capitalists (VCs) often use this method to determine how much a company is worth by looking at how much money they plan to make when selling it. The method considers the risk and value of time when figuring out how much the company will be worth in the future at the exit (IPO or purchase) and lowers it to the present.

Comparable Company Analysis

If two publicly traded businesses in the same industry use the same parameters for startup valuation in the US, then CCA will use those metrics to evaluate a startup. This approach considers ratios including enterprise value-to-EBITDA (EV/EBITDA), price-to-sales (P/S), and price-to-earnings (P/E). The difficulty is identifying similar businesses and considering their different development rates, market potential, and operational efficiency.

Risk Factor Summation Method

The Risk Factor Summation Method begins with an initial value and then multiplied or divided by several risk variables, including management risk, company stage, and technological risk.

Example of Risk Factor Summation Method

Let’s understand the Risk Summation Method using a simple example of an Australian biotech startup that faces several inherent risks, including technological uncertainties, regulatory hurdles, competition, and market acceptance.

Each risk factor is assigned a weight based on its perceived importance and likelihood of occurrence, ranging from 0 to 1, with 1 representing the highest weight.

For instance:

• Technological Uncertainty: 0.3
• Regulatory Approval: 0.2
• Competition: 0.2
• Market Acceptance: 0.2
• Financial Risk: 0.1

Assuming an initial total valuation of $10 million for the startup, the risk-adjusted valuation is calculated by considering the cumulative risk factor weights:

• Risk-Adjusted Valuation = Total Value × (1 – Total Risk Factor Weight)
  = $10 million × (1 – (0.3 + 0.2 + 0.2 + 0.2 + 0.1))
  = $10 million × 0.2
  = $2 million

Hence, based on the risk-adjusted valuation, it can be inferred that the estimated value of the Australian biotech startup amounts to $2 million, factoring in the various risks associated with its technological development and market acceptance.

Book Value Method

The book value method is a way to calculate a company’s worth by looking at its total assets minus its total liabilities, as shown on the balance sheet. While it works well for established companies with lots of physical assets, it could be detrimental to new ventures whose worth is based on their potential for growth and other intangibles.

Berkus Method

The Berkus Method is a framework for valuing early-stage businesses that focuses on five critical areas: fundamental value, technology, execution, strategic alliances, and product rollout.

Example of Berkus Method

Feast Inc. is setting sail in the food delivery app market with a fresh concept. Let’s utilize the Berkus method to assess its potential value:

• Sound Idea (0 – $500,000): The food delivery market is competitive, but Feast Inc.’s USP is strong. The value assigned is $300,000.
• Quality Management Team (0 – $1,000,000): The founders possess experience in tech and logistics. The value assigned is $700,000.
• Prototype (0 – $1,500,000): Feast Inc. has a well-designed app prototype with positive user feedback. The value assigned is $1,200,000.
• Strategic Relationships (0 – $2,000,000): Feast Inc.’s discussions with potential delivery partners are underway. The value assigned is $200,000.
• Product Rollout or Sales (0 – $2,000,000): Feast Inc. is in the pre-revenue stage but has a strong marketing plan and waitlist. The value assigned is $300,000.

Adding these up gives a preliminary valuation of $2,700,000 for Feast Inc.

What are the challenges faced by startups expanding to the US?

From dealing with limited funds to managing a highly competitive industry, startup valuation in US has its challenges. Let’s have a look at the primary ones that startups encounter:

• Financial Challenges – Securing adequate funds can be a significant challenge. Investing heavily in marketing, operations, and product development is crucial to creating a strong presence and expanding in the U.S. market. The need for further fundraising rounds and rising operational expenditures are common problems for startups.
• Marketing and Sales – Different locations and demographics in the United States require different marketing approaches to reach all of them. Startups should modify their sales tactics and messaging to appeal to American consumers, who may have different tastes and habits than those in the startup’s home country.
• Lack of Expertise – Coming to the United States as an entrepreneur without prior experience or familiarity with the local business climate can be daunting. The original team could lack the marketing, legal, and business development expertise necessary to deal with the complexities of the US market.
• Financial Management – Startups planning to expand to the US must meticulously manage their money to cope with the higher expenses and ensure long-term survival. Tasks include making budgets, making financial predictions, and handling cash flow to keep activities and growth going without running out of money.
• Cyber Security – Since startups increasingly depend on digital platforms to protect client data and intellectual property, they must stress the significance of cyber security. Startups in the US must invest in robust security measures to meet data protection laws’ requirements and safeguard their company.
• Meeting Regulatory Requirements – U.S. federal, state, and municipal rules create a complex regulatory environment affecting many company operations. Compliance with numerous rules and regulations, including employment, taxes, and certain industries, can add unnecessary complexity and cost to startup expansion.
• Competition – In the United States, new and existing companies compete for customers’ attention and market share. New entrants need to set themselves apart by providing superior products and services to carve out a special niche in this competitive industry.

Case Studies for Examples of Companies Expanded to US

Here we listed case studies of startups expanded to US:

Spotify

Founded in 2006, Spotify revolutionized music streaming. They entered the US market in 2011 and faced competition from established players like Pandora. The platform quickly gained popularity and reached one million paying subscribers by March 2011. It thrived by focusing on user experience, curated playlists, and freemium tiers. Today, Spotify boasts over 236 million paying subscribers globally, with the US being a major market.

Revolut

Launched in 2015, Revolut aimed to disrupt traditional banking through a mobile app offering currency exchange, international transfers, and budgeting tools. Their US expansion in 2020 was strategic, targeting millennials and immigrants. While facing regulatory hurdles initially, Revolut secured a crucial banking license in the US, indicating long-term commitment and potential for significant growth.

Wise

Formerly known as TransferWise, this company (founded in 2011) aimed to make international money transfers cheaper and faster. Their transparent fee structure and focus on customer experience resonated with US users. Currently, Wise is a profitable company with a growing US customer base, having successfully carved a niche in the remittance market. As of March 2023, Wise had a market cap or net worth of $15.04 billion and an enterprise value of $5.67 billion.

Leverage Eqvista’s Precise Valuation Services For Your US Expansion!

An accurate Startup valuation in the US is necessary for successful fundraising, strategy planning, and managing the US’s legal and competitive landscape. It showcases your company’s past and future achievements and is an essential step toward worldwide development.

If your business needs assistance with 409a valuations to prepare for growth in the US, we can help. With our extensive suite of services, Eqvista ensures precision and conformity in all your valuation endeavors. Our in-depth understanding of 409a values and our cutting-edge cap table management software gives you all you need to navigate startup valuation in the US successfully.

We recognize the importance of correct assessments in securing finance and directing strategic decisions. Therefore, we provide solutions that meet your company’s needs. Visit our website to learn how we can assist you with this important aspect of your expansion journey.