Values are important for any business, but especially for startups. They help guide decision-making and help employees stay focused on the company’s goals. They can also help companies get more investors and customers.
While many established companies get their valuation from revenue or assets, startups are often valued based on their potential, revenue multiples, and other hypothetical figures. This can make it difficult to figure out how much a startup is actually worth. However, there are a few methods that investors and entrepreneurs use to value startups.
Discounted Cash Flow
One common method is the discounted cash flow (DCF) method. This approach discounts future cash flows back to the present to come up with a present value. This method is often used to value publicly traded companies, but can also be applied to startups.
The key inputs for the DCF method are the discount rate and the cash flows. The discount rate is typically the weighted average cost of capital (WACC), which accounts for the company’s debt and equity. The cash flows are the company’s projected future cash flows.
To value a startup using the DCF method, you need to make some assumptions about the company’s future. This can be difficult for startups because they often have little to no historical data. As a result, many people use simplified versions of the DCF method or other methods to value startups.
Valuation by Stage of Development
Another common method for how to value a startup is to value startups based on their stage of development. This approach is often used by venture capitalists.
The most common stages are:
Pre-seed: The company has an idea but no product or revenue.
This is typically the earliest stage of funding, and it can be difficult to find investors at this stage. However, pre-seed funding can be essential for a company to lay its foundation. It can help to cover the costs of developing a prototype and doing market research.
Pre-seed funding can also give a company the resources it needs to build a team and start generating revenue. For many startups, pre-seed funding is the first step on the road to success.
Seed: The company has a product but no revenue.
The seed stage of funding is an important time for any company. This is the time when a company is looking to raise money to help get its product off the ground. However, it can be difficult to attract investment at this stage, as there is often little to no revenue. In order to succeed, companies need to have a strong business plan and a clear vision for their product.
They also need to be able to articulate their value proposition clearly and convincingly. With so much on the line, it’s no wonder that the seed stage is often considered the most challenging time for any company. However, with the right approach, it can also be the most rewarding.
Early-stage: The company has a product and some revenue.
The early stage of a startup is when the company has a product and some revenue. They are typically looking for their first round of funding, called Series A.
During this stage, startups are focused on building their product and refining their business model. They may also begin to scale their operations and expand into new markets. This is an exciting time for startups, as they are starting to gain traction and see real progress.
However, it is also a risky time, as they have not yet proven themselves in the marketplace. Investors during this stage are typically looking for companies with high potential and a clear path to profitability.
Growth-stage: The company is growing rapidly and has significant revenue.
In the early stages of funding, a company is usually focused on growth. This may mean expanding the team, developing new products or services, or entering new markets.
Series B or C funding is typically used to support these kinds of expansion plans. The goal at this stage is to generate significant revenue and continue growing the business.
Typically, by this time, a company is either looking to IPO or be acquired.
The value of a startup typically increases as it moves from the pre-seed stage to the growth stage. This is because investors are taking on more risk when they invest in early-stage companies. As a result, they require a higher return on their investment.
Multiples Method
Another standard method for how to value a startup is the multiples method. This approach uses market data to value a company. To perform the market data valuation, you need to find companies that are similar to your startup and then look at their valuation multiples.
For example, if you’re trying to value a SaaS company, you would find other SaaS companies that have been valued recently and look at their price-to-sales (P/S) ratios. You would then apply the same P/S ratio to your startup.
The main disadvantage of this method is that it can be difficult to find comparable companies in some cases. This is especially true for early-stage startups that are in a new or niche market.
User Base
If your startup is a mobile app, social media platform, or another type of internet company, then you can use your user base to value your startup.
This approach is based on the idea that these types of companies are worth more if they have a large and engaged user base. To value your company using this method, you need to find comparable companies and look at their valuation multiples.
For example, if you’re trying to value a social media company, you would find other social media companies that have been valued recently and look at their price-to-monthly active users (P/MAU) ratios. You would then apply the same P/MAU ratio to your startup.
The main disadvantage of this method is that it relies on a lot of assumptions. For example, you need to assume that your users are actually worth something to someone else.
Final Thoughts
There is no one right way to value a startup. The best approach depends on the individual company and the market it’s in. As a result, it’s important to be familiar with multiple methods so that you can choose the best one for your particular situation.
