Startup valuation is the method of calculating the worth of a new company. In rounds of seed fundraising, investors provide funds in return for company shares. To calculate the number of shares to offer a seed investor in exchange for money, entrepreneurs need to get a valuation report. An investor will also need this report to assess the company’s operations and development potential. Therefore, getting startup valuation from experts is a necessary step for businesses seeking financing from investors. To understand how to value a startup, this article discusses different startup valuation methods, startup valuation multiples, and startup valuation software.
Startups and their valuation
A successful startup is built on an innovative concept that tries to satisfy a need in the market. A startup experiences numerous phases of development and expansion from its beginning as it works to realize its actual market potential. However, without adequate monetary inputs, development is impossible. Additionally, investments cannot take place until the investors know the worth of the startup. This is determined based on its present situation and promise for the future. Thus, the cornerstone for getting the crucial investment for a firm is startup valuation.
What is startup valuation?
The process of determining a company’s worth based on its physical and intellectual assets is known as startup valuation. Analysts also pay attention to its capacity for future development. Investors and entrepreneurs utilize several variables to arrive at a near-exact assessment. But it’s crucial to understand that the valuation of a new business is a challenging procedure. Particularly in the case of companies in the pre-revenue stage since a lot is reliant on estimates and industry-standard assessments.
How does startup valuation work and its importance?
Every startup depends on investment funding. To get the necessary capital, they must seek investors. A new company will only get funding from an investor if they believe it can make significant returns on its shares. Investors consider the valuation of businesses as a starting point when assessing financing requests for startups. Methods used to value startups differ according to their development stages.
Depending on where a startup is during its lifecycle, various qualitative indicators and statistical analyses are used. Let’s examine the 4 fundamental phases of a business and how to value a startup at each phase before delving deeper into the specifics of startup valuation:
- Seed round – This is the first stage of a startup when it is only a concept supported by an accomplished founding team that is ready to go forward. In this scenario, setting distinct goals in precise timeframes and determining what sources you’ll require helps the valuation of the business. The knowledge of market needs and product viability helps you appraise your seed startup and determine negotiation values with angel investors and VCs. Comparable methods are ideal for valuing seed-stage startups with no track record. The company is compared to others in its industry, geography, business strategy, and market size.
- Series A – A startup has a prototype and sales revenue during this stage. Series A entrepreneurs could get multiple term sheets from investors, making business valuation difficult. Series startup valuation can be done by employing typical valuation methodologies or valuing based on sales, the number of customers, sales trends, prospective market, and other momentum-showing factors and Key performance indicators.
- Series B – A startup has shown its viability and now intends to boost earnings using existing business strategies in this stage. Series B startups are worth more than series A startups because founders can demonstrate to angel investors and VCs significant potential for growth backed by a track record. VCs spend more on establishing series B startups. Series B companies may be appraised based on their achievements, assets, income estimate, and other series B valuation methodologies. Series B valuation can also use the post-money technique.
- Series C – By this point, a startup is making millions of dollars. At this point, scaling up will either result in acquisitions or an IPO. In either case, business valuation is necessary to understand company shares’ value and determine its price. To evaluate the startup valuation at this point, sophisticated indicators and valuation algorithms are needed. Consult a valuation expert to help set the right price for a share offering in case of an IPO.
Difference between startup valuation and company valuation
An established publicly-listed company will have more concrete data to support its claims than premature startups. Estimating the value of such an established firm is called company valuation. Calculating the worth of a firm is made simpler by consistent sales and financial data. The EBITDA method, which determines a company’s worth with its profits before interests, taxation, loss, and amortization, is often used to do this. EBITDA is equal to net income plus interest, taxes, depreciation, and amortization.
On the other hand, it might be difficult to assign a value to a startup business that has no income since you won’t have access to these numbers. Although the majority of startup valuation techniques do not include information on earnings, taxes, and amortization, you can take other important elements into account throughout the process.
Multiples in startup valuation
There are several kinds of valuation techniques that depend on various variables and presumptions. The accuracy of the valuation process depends on the correct predictions. One sort of study that hinges on the predictions is the valuation multiples approach.
What are startup valuation multiples?
A technique that compares two financial metrics as a ratio is called a valuation multiple. This increases the comparability of enterprises in the same industry. In valuation multiples, one measure is divided by another. For example, take the share price to profits per share. Valuation multiples facilitate the comparison of a company’s value to that of other comparable businesses. The method presupposes that a ratio will be applied to the company.
How do valuation multiples work?
The financial and operational features of a corporation are combined into one figure using valuation multiples. To calculate valuation, this figure could then be multiplied by a business metric. The indicator you are concentrating on for the present study serves as the denominator in the valuation multiple calculations; in the case of the P/E ratio, this is earnings. You can convert the PE ratio into a multiple to be used in the valuation analysis. This is accomplished by multiplying the metric through both of the equation’s sides. For example:
Types of valuation multiples
Various valuation multiples are employed in different industries and come in several types. Below are a few multiples to be aware of:
- EV/EBITDA – The most popular valuation indicator is the EV/EBITDA, which substitutes for the company’s available cash flow. It often falls between 6x and 18x.
- EV/Revenue – The discrepancies in accounting affect EV/Revenue. It is calculated as a percentage of either the enterprise value or sales to revenue.
- Enterprise value multiples – In a merger or acquisition, multiples of the enterprise value are required. Enterprise value multiples are the most suitable multiples to employ when evaluating an acquisition or merger while taking the impact of debt financing into account.
- EV/EBIT – When non-cash charges indicate costs associated with using assets that will eventually require replacement, EBIT accounts for amortization and depreciation. It often fluctuates between 10x and 25x.
- EV/Invested Capital – When capital assets are the primary sources of profits, this statistic is useful. The multiple is often used in capital-intensive sectors because of this. The Enterprise Value to Invested Capital measures this. Each dollar of invested capital is valued in terms of its EV.
- EV/EBITDAR – In the transportation and hospitality sectors, this method is most often utilized. The EV/EBITDA and leasing charges include this. It is equivalent to the ratio of enterprise value to pre-deduction earnings. Interest, tax, depreciation and amortization, and rental costs are all deductible expenses.
- Price/Book Ratio – When the assets are the main source of profits, this ratio is employed.
- Equity multiples – This is used to evaluate investment choices, particularly when an investor is aiming to acquire a minor stake in a business.
- P/E Ratio – The Price-Earnings ratio (P/E ratio) is used to calculate earnings per share. One of the most popular metrics, the P/E ratio, is determined by dividing the total diluted shares by the product of the earnings per share (EV/Net income). They often fall between 15x and 30x.
- Price/Sales – This measure may be used to quickly evaluate losses in business situations.
How to calculate startup valuation?
Although there will always be some element of guesswork involved in startup valuation calculations, you can prepare some useful resources in advance, such as a balance sheet and other financial documents. Be prepared to evaluate your team’s abilities and experience and pinpoint any strengths and limitations. You can examine online indices and open business records to directly compare the worth of a startup to that of comparable companies. By their very nature, appraisals will vary between regions, sectors, and time.
Startup valuation methods
Your valuation specialist has a range of valuation approaches to choose from while carrying out startup valuation. Here are a few standard techniques for startup valuation:
- Venture Capital Method (VCM) – The VCM can be used to obtain a pre-revenue valuation using mathematics. The investor defines an expected exit valuation premised on the present situation and the projections, and then he determines his targeted ROI, attaining the post-money valuation estimates. A pre-money valuation can then be easily calculated with the formula- pre-money valuation = post-money valuation – investment. This value can then be adjusted according to dilution.
- Book Value Method – Traditionally, the book value of a new business is equal to its overall assets minus total liabilities. In other words, the Book Value technique aligns your startup’s net value with its valuation. The Book Value approach provides an asset-based value. It is comparable to, but simpler than, the Cost-to-Duplicate Approach.
- Risk Factor Summation Method (RFS) – RFS helps early-stage entrepreneurs and pre-money assessments. Pre-money valuation is the startup’s worth before receiving external capital. It utilizes the business’s current valuation determined by other techniques and adds 12 risk variables to determine the valuation of the startup in question.
- Discounted Cash Flow Method (DCF) – The DCF approach uses a discount rate to estimate how much revenue the startup will likely produce in the future. The DCF valuation approach is equally significant for assessing a business using industry standards. Some startups prefer the DCF technique more than the market-comparable method since the valuation is unaffected by industry trends and the scale of the business because it is focused only on financial data and assumptions.
- Scorecard Valuation Method – This fundamental valuation approach compares the company to others with comparable key members, industries, and locations. It helps angel investors evaluate companies with growth potential but no revenue. The scorecard valuation approach compares the company against publicly backed companies.
- Cost-to-Duplicate Approach – The name says it all for this method. You’re calculating what it would cost to rebuild your company without your brand or reputation. This method adds your tangible assets’ fair market value. It can also include costs of R&D, prototypes, patents, and other expenditures. This strategy doesn’t capture a company’s entire worth, especially if it’s profitable. You might need to neglect consumer involvement when estimating your startup’s value.
- Comparable Transactions Method – Comparable Transactions method is a useful valuation approach in which the startup valuation is determined by comparing it to other companies with similar business models, industries, and stages. This is a useful valuation strategy for all firms, premature startups, and pre-revenue startups pursuing early capital.
- The Berkus Method – The Berkus Valuation Method is perfect for pre-revenue startup assessments since it doesn’t depend on the revenues produced but instead on other, more intangible aspects of the company. The Dave Berkus technique takes into consideration risks related to technology, execution, market, and manufacturing.
How can a startup valuation software help calculate the value of a startup?
To deliver startup valuation with a series of prepared questions, a valuation program leverages automation technology driven by AI. Instead of providing a comprehensive report, it provides a succinct summary to help the company pitch its idea, raise money, and get new contracts.
Startup valuation software makes it simple to get a condensed startup valuation that fulfills the purpose of attracting investors and stakeholders for a fraction of the price paid to the valuation professionals for a thorough assessment.
The majority of valuation firms invest a lot of time and energy into producing accurate and trustworthy assessments. Startup valuation software offers business assessment swiftly by using cutting-edge technology to assess your firm’s value in just a few minutes. By operating without human mistakes, startup valuation software ensures accurate and relevant value results.
Get your startup valuation report in minutes with Eqvista’s software
With the startup valuation software incorporated into Eqvista’s website, you can quickly and easily determine the worth of your startup in a short amount of time. All you have to do is answer 30 multiple-choice questions on a questionnaire. It will require comprehensive details of the business’ Team/management, Business, Product, Market Sales, and Marketing. There is no need to present or prepare any documentation. After completing the questionnaire, an automatic report will be provided to you immediately.
Why choose Eqvista to value your startup?
Eqvista is one of the leading valuation providers in the industry. With our affordable rates and top-quality customer service, Eqvista makes it easier for startups to get a valuation for their numerous business needs. Not only do we offer a comprehensive cap table management solution, but we also provide business valuations and filing services. To learn more about how Eqvista can help you and your startup succeed, contact us today!