How will 2024 change valuation?
In 2024, the business valuation landscape will go through some significant changes. Since representatives for almost half the world will be elected in 2024, substantial changes to government policies are on the cards. At the same time, we can expect some key regulations regarding ESOPs to be established.
The rise of transformative businesses with never-seen-before offerings, too, warrants a change in methodologies. Join us as we discuss how 2024 will influence valuations!
Valuation in 2024
Some of the reasons for changes in valuation in 2024 are as follows:
Regulatory changes
Since there is a lack of regulation on how to establish a company’s worth before issuing employee stock ownership plans (ESOPs), it can lead to misinterpretations and hefty tax liabilities. According to the National Center for Employee Ownership (NCEO), from 2013 to 2022, companies lost an average of $38.55 million annually due to ESOP-related cases. The figure would be even higher if we included litigation costs.
A ray of hope for the ESOP community is that the SECURE 2.0 Act requires the US Department of Labor (DOL) to come out with regulations on how to determine the fair market value (FMV) of company stocks to issue ESOPs. These regulations are expected anytime now.
Methodological changes
In 2024, we must acknowledge the different growth rates and risks associated with each industry. We see new business models emerge every year. Each has its unique regulatory environment, competitive landscape, and total addressable market.
Hence, applying the same methodology to establish every company’s worth makes less sense than ever. There is a need to understand the intricacies of each industry segment, research suitable techniques, and zero in on suitable multiples.
Role of technology
PrometAI rightly suggests that blockchain and machine learning will be two technologies that will transform how we value business starting in 2024.
By recording valuation updates on a blockchain, we get a high degree of protection against the dark arts of the financial world a.k.a. data manipulation. At the same time, blockchain technology also boosts collaboration ease.
On the other hand, machine learning could unlock real-time valuations. We have witnessed the might of artificial intelligence (AI), an application of machine learning, in researching information via the Internet. So, it stands to reason that machine learning could also research private equity transactions being reported globally.
Market conditions
Three important factors will greatly impact market conditions in 2024 and they are:
a. Elections
The Time magazine has described 2024 as ‘the election year,’ also stating that as elections are held in 64 countries plus the European Union, more voters than ever will head to the polls. We look at government policies very closely when we are trying to calculate a company’s worth.
when there is a potential for a shift in power in so many regions, the policy and regulatory environment could change in the said regions. Hence, we expect investors to be cautious when setting valuations in 2024.
b. Inflationary pressures
In 2024, all eyes will be on the US Federal Reserve to see how long it maintains high interest rates to fight inflation. If inflation persists, it might skew long-term supply cost expectations among investors.
Additionally, high interest rates mean that government bonds, reputed to be the least risky assets, will be more attractive. At the same time, the cost of borrowing for companies will remain high. Thus, inflation and how the US Federal Reserve reacts to it will remain a closely followed story in 2024 with regard to business valuations.
c. Taxation
In the context of this article, some important proposals made by US President Joe Biden in his proposal for the FY25 budget were:
- Increase corporate income tax from 21% to 28%
- Increase corporate alternative minimum tax from 15% to 21%
- Increase corporate stock repurchase excise tax from 1% to 4%
- Increase tax rate on foreign earnings of US multinational corporations from 10.5% to 21%
If these proposals pass, the income US companies can distribute to shareholders will decrease. As a result, the valuations would be negatively affected.
d.Variance across startup stages
According to PitchBook’s US VC Valuations Report, in Q1 2024, the median valuation at seed rounds was $12 million, relatively unchanged from previous quarters. An encouraging sign was that the median deal sizes in pre-seed and seed rounds reached record highs in this quarter. In the same quarter, median early-stage valuations rose by 16.3% to $46.5 million and median late-stage valuations rose by 36.1% to $70.1 million.
Methodologies for Valuation Manuals in 2024
As we have highlighted earlier, with evolving business models, there is an increasing need for industry-specific guidelines to establish a company’s worth.
Industry-specific guidelines
One of the industries gathering momentum is artificial intelligence (AI), with entities like OpenAI, Anthropic, Anduril Industries, and Databricks leading the way. Hence, there is a growing need to decipher the value of AI startups.
In response to this need, Finro Financial Consulting explored various methodologies in its AI Startup Valuation Report 2024 released in March this year.
As per their findings, the Berkus and scorecard methods are suitable for idea-stage AI startups, and for post-idea-stage AI startups, the revenue multiple, EBITDA valuation, and discounted cash flow (DCF) methods were suitable.
Data asset valuation
A business’ growth depends greatly on its ability to learn about its market. In today’s world, the most efficient and evidence-based method to ‘learn’ is through data. Hence, we must treat data as an asset of businesses and understand its value to establish a company’s worth.
Following are some methodologies that we feel can accurately capture the value of data:
| Methodology | Use case | Overview |
|---|---|---|
| Market approach | When the data has value for other companies or organizations and there have been transactions involving similar types of data | Applying statistical methods to transactions involving similar types of data |
| With-and-without approach | When the data is an important input or catalyst for the company | Comparison of estimated cash flow without data versus cash flow with data |
| Cost approach | When the data is a vital input and will take time to replicate | Present value of all costs incurred in producing said data |
| Relief-from-royalty approach | When the data is a vital input but can be acquired via a license to use from a third party | Cost of licensing over the lifetime of the company (-) Minus Present value of all costs incurred in producing said data over the lifetime of the company |
Valuation Updates From Eqvista -key Factors That Influence Software Valuation
Valuation updates from platforms like Eqvista involve a thorough assessment of various factors that influence a company’s worth. Here’s a detailed breakdown of key factors that typically influence company valuation:
- Technology: The technology developed by a startup and its technological expertise are its invaluable assets. They can directly influence a company’s cost structure and can open up new revenue streams in the form of licensing fees. Hence, Eqvista considers your company’s technology to establish its value.
- Functionality: If your product has unique functionalities that differentiate it from competitor products, it must be considered to establish your company’s worth. So, any changes in the functionality of your product as well as your competitor products can influence your company’s worth.
- Adaptability: The Eqvista platform can adapt to changing market conditions and consumer preferences. We also customize and tailor our services to meet specific client requirements.
- Documentation: If your products and performance are well documented, it is that much easier to establish your company’s worth. Documentation provides transparency and can help effectively settle disputes regarding your company’s worth.
- Approaches: The three common methods of company valuation are:
Asset-Based Approach
The asset-based approach involves summing all assets and subtracting all liabilities. It focuses on the company’s fair market value (FMV), or the net asset value.
Calculation example:
Let us assume that Company A has the following assets and liabilities:
Assets
- Building = $800,000
- Machinery = $600,000
- Inventory = $100,000
- Patents = $300,000
- Accounts receivable = $100,000
Liabilities
- Bank loan = $1,000,000
- Accounts payable = $100,000
- Short-term debt = $40,000
So, Company A’s total assets will be = Building + Machinery + Inventory + Patents + Accounts receivable
= $800,000 + $600,000 + $100,000 + $300,000 + $100,000
= $1,900,000
And its total liabilities will be = Bank loan + Accounts payable + Short-term debt
= $1,000,000 + $100,000 + $40,000
= $1,140,000
Company A’s valuation will be equal to the difference between its total assets and liabilities.
Total assets – Total liabilities = $1,900,000 – $1,140,000
= $760,000
So, Company A’s valuation is $760,000.
Income Approach
The income approach is based on the idea that the value of a business lies in its ability to generate revenue in the future. It involves estimating future cash flows and discounting them to find the value of a business.
Calculation example:
Let us assume a discounting rate of 4% and the following future cash flows for AB Corp, a financial services company.
| Years since the initial funding | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Cash outflow | $30,000 | $30,000 | $400,000 | $45,000 | $45,000 |
| Cash inflow | $100,000 | $300,000 | $300,000 | $600,000 | $600,000 |
Now, let us discount the cash flows as per this formula:
Present value = (Cash inflow – Cash outflow) / (1 + Discounting rate)Year
By applying this formula, we will get this table:
| Years since the initial funding | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Present value of net cash flow | $67,308 | $249,630 | -$88,900 | $474,416 | $456,170 |
AB Corp’s valuation will be the sum of the present values of all net cash flows, i.e. $1,158,624.
Market Approach
If businesses similar to yours have been sold recently, these transactions can form the basis to establish your valuation. For instance, recently Figure, a Californian humanoid robot startup, raised $675 million at a valuation of $2.6 billion in a series B funding.
Suppose there is another Californian humanoid robot startup of the same market share and level of expertise. Then, such a startup is likely to receive a valuation close to $2.6 billion in series B funding.
FAQs
Here, we have added a few frequently asked questions about valuation.
1. What is the seed valuation for 2024?
As per PitchBook’s data, in Q1 2024, the median valuation at seed funding rounds was $12 million in the US.
2. What is the early-stage valuation for 2024?
As per PitchBook’s data, in Q1 2024, the median valuation at early-stage rounds was $46.5 million in the US.
3. How is a company valued?
A company’s value can be calculated based on expected cash flows, the value of net assets owned, growth potential, industry and market scenario, and risks involved. Professionals may also consider qualitative factors like quality of management and competitive advantages.
4. What is the valuation multiple of edtech startups in 2024?
As per Finro Financial Consulting, the average revenue multiple for edtech startups is 14.4x.
5. How did 2024 change the valuation landscape?
In 2024, the way we value companies will be influenced by factors like changes in government policy, the introduction of key regulations, the treatment of data as an asset, and new methodologies emerging in response to never-seen-before business propositions.
Ensure tax compliance in a changing landscape with Eqvista!
In 2024, as a valuation service provider, Eqvista found itself at a stage where curiosity and due diligence would be most rewarded. The year can be defined as the year of changes with transformative technologies like AI rearing their heads and events like government elections, taxation changes, and the introduction of valuation regulations for issuing ESOPs being on the cards.
To honor our commitment to provide the most accurate valuations swiftly in such an environment, we have invested our efforts in investigating the intricacies across stages and sectors. Connect with our team and learn more about our valuation services by clicking here.
