How to do Startup Valuation?

How to do Startup Valuation? Market Multiple

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 are 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.

Cost to Duplicate

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

Berkus Approach

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.

Discounted Cash Flow Method (DCF)

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.

Berkus Approach

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.

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