What Is Startup Valuation?
Startup valuation is the process of determining the value of a startup venture. There are many reasons you may want or need to assess a startup’s value:
- You are looking for a co-founder
- You are seeking investors
- You are applying for a business loan
- You are offering equity to employees or other stakeholders
- You are acquiring or merging with another business
Because many startups do not have a financial history to prove their concept or estimate future earnings, startup valuations take into account numerous other factors including, but not limited to, the market forces of the industry, sector, and market in which they compete.
In any case, the value of your startup is an important consideration. Lower valuations mean that you may have to give up more equity in the startup in order to secure an investment.
On the other hand, higher valuations mean you get to retain more of the equity in your company, as opposed to diluting it, and providing better returns for stakeholders.
Pre-Revenue Startup Valuation vs. Mature Business Valuation
So, how does pre-revenue startup valuation compare with a mature business valuation?
In mature businesses, there is a plethora of data on the performance of the business. The company’s assets, revenues, cash flows, and earnings can all be used to provide insights into the value of the business and what its future revenue and earnings might look like.
In mature businesses, revenue-based (or income-based) approaches are some of the most popular valuation methods, deriving valuations of your business based on gross sales, cash flow, earnings, or a number of other revenue and profit-based factors.
The most popular revenue-based approaches for mature businesses are:
- The times-revenue method
- Multiples of earnings method
- Capitalization of cash flows method
- Discounted cash flow method
Each of the above approaches derive valuation based on future sales and earnings.
For a pre-revenue startup, assigning a valuation to a company without revenue can be much more challenging.
Pre-revenue startup valuations often rely on projections of future earnings. Since projections of future earnings are often unreliable, a number of additional factors are often taken into consideration when valuing a pre-revenue or early-stage startup.
Why Is Startup Valuation Important?
Startup valuation is important to both entrepreneurs and investors. Valuation is important to entrepreneurs because it dictates how much of the company founders have to give up in exchange for investments. Valuation is also important to investors, as it signals how much return they may get on their investment.
In order to get the same investment, startups with higher valuations are more likely to receive an investment and have to give away less equity than lower valuation startups.
For example, a startup with a valuation of $500,000 might have to offer 20% of the equity of the startup to get an investment of $100,000, while a startup with a valuation of $2 million would have to offer only 2% of the company’s equity to get an investment of the same amount.
Factors Influencing Startup Value
What influences the value of a startup? The short answer: just about everything, including industry and economic trends, your reputation and your team, the number of users and paying customers, how fast you are growing, and how profitable you are.
Here are some of the top factors that influence startup value:
Your startup team is a big factor in startup valuation, and for many investors, it is the most important factor impacting their investment decisions.
Investors prefer and attribute a higher value to startups that are led by a team over those led by an individual. Moreover, investors want to see that the startup is led by the “right team.” Teams with experience, talent, and technological know-how are much more likely to get higher valuations than an unproven team.
There are several things that investors look for in a startup team.
- Experience: Investors prefer and attribute higher valuations to teams with proven experience. If your team includes others with experience launching, growing, and scaling startups, then it is more likely to receive a higher valuation than unproven teams. For teams with little startup experience, investors want to see experience and expertise in your industry, niche, or technology, boosting your chances for success.
- Diverse Skills: Investors also value teams with the diverse skills needed to launch and grow your startup. The skills of your team members should complement each other. A team full of programmers may be able to build a beautiful product, but without knowledge of how to market and sell their product, they may have trouble growing and scaling a startup.
- Passion: Another quality that is highly valued by investors is passion. Investors want to know that your founders and founding team are passionate about building the startup and ensuring that it succeeds.
Size of the Opportunity
Another key factor influencing a startup’s value is the size of the opportunity. You can develop a cutting-edge product or service, but if the market is not large enough to support your startup and make a profit, you will never achieve product-market fit.
To understand the size of the opportunity, you need to determine the size of your market and its revenue potential. Is there a large enough market to make your product/startup viable?
To determine the size of your market, there are three things that you need to work out: the total addressable market, the serviceable available market, and the serviceable obtainable market.
The total addressable market (TAM) is the entire size of the market for your product or service. This includes all of the people or businesses that have the problem to which your solution solves.
The serviceable available market (SAM) is a subset of the total market that you can actually reach. Your SAM may be influenced by many factors, including cost and the geography you serve.
The serviceable obtainable market (SOM) is a subset of your reachable market that you might be able to acquire realistically. Of course, determining your SOM will depend on your industry and is highly subjective. However, this will give you a good idea of how big your startup can grow. The bigger the SOM, the higher your valuation.
Another important influence on a startup’s value is traction. In the startup world, traction refers to progress and can be measured and shown along many dimensions. Traction shows investors that you are moving toward product-market fit.
Investors want to know where your startup is heading. Are you making progress? Meeting your goals? Attracting users? Converting paying customers?
Traction is more than just your user base or revenue. Traction can also be measured and assessed with a number of different metrics such as:
- Number of users
- Number of customers
- Growth rate
- Market share
- Conversion rate
- Customer acquisition costs
- Customer engagement
- Average revenue per account
- Word of mouth and organic growth
- Product usage intervals
You can also measure traction using a number of metrics that indicate product-market fit, such as:
- Net promoter score
- The product-market fit test
- Customer satisfaction scores
- Customer retention
- Customer lifetime value
Another factor that influences startup valuation are your entrepreneurial, brand, and/or product reputations.
Investors are willing to bet more on experienced entrepreneurs with track records of building and growing startups through successful exits.
For first-time founders and those without experience, you still need to work on cultivating your reputation. To do this, you should be networking in your local entrepreneurial ecosystem. Many angel investors and VCs source their deals through referrals. It is much easier to secure an investment when you are connected to the right people and the right networks.
Your brand or product reputation also may influence your startup valuation. If consumers are aware of your brand or your product and you are already generating buzz, you are also likely to earn a higher startup valuation. Brand awareness is critical to the long-term success of any startup.
The Number of Paying Customers
Another factor that greatly influences startup valuation is the number of paying customers. While building your startup’s user base is a great first step, you also need to monetize your users. It does not matter what industry or market you are in; you need a business model that can derive revenue from paying customers.
In many business models, your users and your customers may not be the same. Think about free-to-use services like search engines, social networks, and mobile applications. While many of these services appear free to use, they still have paying customers — advertisers, affiliates, etc., providing a steady stream of revenue for the business.
While the number of users may influence startup value, investors will have much more confidence in your business model (and value your startup more) as you grow the number of paying customers.
Earnings and Profitability
Another key factor that will influence the value of a startup is its earnings and profitability. Forecast earnings and exit value are key factors in numerous startup valuation methods.
Earnings and profitability are better indicators than revenue, as revenue can often be inflated through deep discounts and sales to the point of selling at a loss. More important are the profit margins and earnings, which speak to the company's true value.
Unfortunately, in many startups, especially pre-revenue and early-stage startups, forecasts of earnings and profitability are used for startup valuations. Since many entrepreneurs’ forecasts are often overly optimistic, forecast earnings and profitability should not be the sole indicator.
Industry Life Cycle and Trends
Other factors that may influence the value of your startup are where you enter the industry life cycle and the current industry trends.
If you are entering an emerging industry, you may be facing an uphill battle convincing both customers and investors that your startup’s products or services are what they need. You also face the potential for competition from copycats, who will benefit from not having to first establish the market. At the same time, new markets are ripe with potential and offer lucrative opportunities for growth.
On the other hand, if you are entering a mature market, you may be faced with high levels of competition from established industry veterans. Even if you are innovating within your business model, you may be seen as the copycat without a competitive advantage.
What’s more, the industry you enter may significantly influence the valuation of your startup. Popular and booming industries have more interested investors (and at a premium) than if you are entering an old industry or one that has little room for meaningful innovation.
Amount and Frequency of Capital Raised
Finally, the amount and frequency of the capital you have raised will also influence the value of your startup. In the startup world, money follows money.
The earliest investors in a startup are usually the toughest to acquire. Once early investors have signed on and provided seed capital, it acts as social proof, increasing the confidence of other investors in future rounds.
Subsequent funding rounds often become easier and easier to secure as long as the startup meets its goals and gains traction. Often, the buzz in the investor community alone generates interest and instills investors with a fear that they might miss out on a lucrative opportunity.
Startup Valuation Methods
Determining how much a startup is worth can be a complex process, and startup valuation can often be subjective.
In a mature business, there are a number of factors that are commonly used to determine valuation. These include the company’s assets, revenues, cash flows, and earnings.
However, many startups have limited physical assets and little to no revenues, cash flows, or earnings. Thus, startup valuation often relies on projected future earnings, market comparisons, or other criteria important to investors and the market.
The type of valuation you use will often depend on the industry, the stage of your startup, and the preference of the type of investors you are seeking. In many cases, a combination of valuation methods will be used to more accurately estimate a startup’s value.
Although you can perform many of these startup valuations yourself, depending on the reason for your startup valuation, you may want to speak with a professional business appraiser for the most accurate value or for professional use.
Here are 10 of the most useful and popular startup valuation methods:
Several startup valuation methods are based on a startup’s forecasted earnings and return. These include the discounted cash flow method, the venture capital method, and the First Chicago Method.
The discounted cash flow method (DCF) is an earnings-based valuation method that can be used to value startups and mature businesses alike. The DCF derives a startup's valuation from its discounted future expected earnings, as measured by cash flow.
In other words, the DCF discounts a startup’s future expected cash flow to today’s value to arrive at a startup valuation.
The DCF method requires two primary assumptions:
- Startup valuation is based on future revenues.
- Earnings in the future are worth less than what they are today.
To calculate the discounted cash flow valuation of your startup you use the time value of money to discount each year of projected profits by the weighted average cost of capital (WACC) and add them together. You will need to compile pro forma financial statements to project future growth and profits; however, you can find calculators online to conduct these complex calculations.
The discounted cash flow valuation formula is:
Discounted Cash Flow Valuation = DCF1 + DCF2 + DCF3 + DCF4 +DCFN
Where DCFN = CFN / (1+r)N ,
*CF = Cash Flow
*r = required rate of return
Because the DCF method bases valuation on expected future earnings, this method is suited for startups and young companies that expect significant growth in the future.
Another earnings-based valuation, and one of the most common startup valuation methods among investors, is the venture capital method (VC). The VC method is a startup valuation approach based on the startup’s estimated exit value, which is calculated as a discounted multiple of future earnings.
The VC method is based on the premise that venture capitalists and other investors expect a required rate of return, but they do not realize their returns until an exit occurs (ideally a merger, acquisition, or IPO).
So, in order to determine the pre- and post-money valuations for a startup, the VC method works backward from the expected exit value, discounted by the required rate of return, to calculate a startup's value.
Exit Value / Required Rate of Return = Post-Money Valuation
Post-Money Valuation − Investment = Pre-Money Valuation
Because the VC method works backward from an estimated exit value, it is a popular method used to value early-stage, pre-revenue companies.
There are seven steps to calculate a venture capital method valuation:
Step 1: Determine the Investment Needed
The first step in calculating a venture capital method valuation is estimating the size of investment needed. Although we will not need this until later when determining the valuation and ownership stake, you will need to know how much investment is needed to reach the milestones you will use to calculate your exit multiple.
Step 2: Determine the Timing of Exit
Next, you will need to estimate the timing of an exit (merger, acquisition, IPO, etc.). In general, venture capitalists and other investors are typically looking to recoup their investment and realize their returns within three to seven years. So, this is typically the time frame of seeking an exit.
Step 3: Forecast Startup Financials
Once you determine the timing of an exit, you will then need to forecast the startup’s financials through the projected exit. Unlike the DCF and First Chicago methods, in the VC method, a startup’s earnings are not taken into account when calculating a startup’s value. However, the projected financials are relied upon to calculate an exit value, so it is especially important to be as accurate as possible in forecasting the startup’s financials.
Caption: In order to determine your startups valuation using the Venture Capital Method you will need to forecast your startups revenue and net income through a planned exit.
Step 4: Calculate an Exit Multiple
In addition to forecasting the startup’s financials, you will also need to calculate an exit multiple based on comparable companies in order to estimate an exit value or price. For example, if comparable companies (or “comps”) are selling at a value of 5x net income, you would estimate your exit price at 5x the net income you project in your exit year.
Step 5: Estimate Exit Price
To estimate the exit price you will then apply your exit multiple to your projected financials in the exit year.
Step 6: Discount to Present Value at Required Return
Once you have estimated an exit price, you will then need to use the time-value of money to discount this price by the investor's required rate of return in order to determine present value. This is the startup’s post-money valuation.
A startup investor’s required rate of return will likely be much higher than the required rates of return that investors expect from mature companies trading on the open market. Venture capitalists often expect rates of return ranging from 30% to 50% or more to account for the inherent risk in investing in startup ventures.
To discount the price to present value you will apply the discounted cash flow formula:
PV = CFN / (1+r)N ,
*PV = Present Value
CF = Cash Flow
*r = required rate of return
To apply this to the example with a required rate of return of 30%:
PV = $13,500,000/ (1.3)5
PV = $3,635,943
Step 7: Determine Valuation and Ownership Stake
Finally, with the estimated present value known, this is the post-money valuation. Following the formula Post-Money Valuation − Investment = Pre-Money Valuation, you are able to determine what the startup’s present value is as well as the ownership stake that will need to be relinquished in order to obtain the necessary investment.
Going back to the example, with a post-money valuation of $3,635,943 and an investment of $1,500,000, the pre-money valuation is $2,135,943. In order to obtain the necessary investment, the startup would have to offer approximately 41.25% of the equity in the venture.
Caption: The Venture Capital Method of startup valuation determines the pre-money valuation (and investors ownership stake) be working back from the post-money valuation and the size of the investment.
The First Chicago Method is a hybrid method of startup valuation that incorporates a discounted cash flow approach to valuation with a multiples-based approach to account for risk.
There are five steps to determine a First Chicago Method valuation:
Step 1: Forecast Revenue Scenarios
To calculate a First Chicago valuation, you first need to account for risk by estimating future earnings along three different scenarios: the best case, base case, and worst case.
The best-case scenario forecasts expected earnings with ideal, or best-case, outcomes. Best-case scenarios must be realistic, but they project future growth and profits that surpass most expectations.
The base-case scenario is the expected scenario. Base-case scenarios represent the most likely outcome.
The worst-case scenario forecasts what expected earnings might be if things start going wrong. Worst-case scenarios might not account for disasters or emergencies, but they project future earnings that underperform most expectations.
Following the First Chicago Method, you will need to forecast future earnings for each of these three scenarios through an exit event — typically three to seven years.
Step 2: Determine Exit Price
Next, you will need to determine a terminal value (i.e., exit price) for each of these scenarios if they were to prove true. The terminal value can be calculated by using an exit multiple for comparable exits under each scenario. Comparable exits are those in which similar startups (stage, industry, revenue, geography) exited through merger, acquisition, IPO, or even divestiture.
Step 3: Weigh Each Scenario by Likelihood
Once you have forecasted each of these possible scenarios, you then must assign probabilities for the likelihood of each scenario occurring. How likely is it that your best-case scenario, your base-case scenario, and your worst-case scenario will occur? The anticipated probability for all three scenarios should add up to 100%.
Next, you will need to weigh each of your three projected outcomes (and the terminal value) by the probability of each scenario occurring for each forecasted period and add these together. This represents your expected earnings or return for each period.
Step 4: Discount Expected Earnings to Determine Present Value
Finally, you will need to discount your expected earnings by your required rate of return following the discounted cash flow valuation method discussed previously. Each period, along with the discounted terminal value, is then added together to determine the present value of the startup.
Taking into account the risks associated with startups, the First Chicago Method is often preferred to the discounted cash flow method alone. Developed by First Chicago Corporation Venture Capital, it has become the valuation method of choice of venture capitalists and private equity investors.
Market-based valuations are another common approach to startup valuation.
Market-based valuations estimate a startup's value by comparing it to other startups. These include the comparables method, the risk factor summation method, and the scorecard valuation method.
The comparables method bases a startup’s value on the value of comparable startups (or comps) that have recently sold. This is then used as a benchmark of what your business is actually worth.
To calculate a comparable startup valuation, you will have to research similar startups which have sold recently.
For example, let’s assume you are trying to sell an ecommerce startup. You research ecommerce startups with traffic and revenue similar to yours that have sold in the past six months and find that, on average, they sold for $1.5 million. This gives you an idea of how investors in the market might value your startup as well. In this case, you would assign a comparable company valuation of $1.5 million to your business, assuming economic and geographic-specific conditions are similar to the comparable businesses.
To determine a robust comparable valuation, the concept of multiples is often applied. You can use a multiple to account for the differences between your startup and your comps in key metrics, allowing for flexibility in comparing your startup and your peers.
For example, let’s say that you found three similar startups that have been acquired in the past year.
Caption: A comparables method compares a startup's key performance indicators (KPIs) with the KPIs of other similar businesses in your industry that have been recently sold in order to determine startup valuation.
Examining the similar companies that sold, you can determine that Startup 1 was acquired at a cost of $16.50 per user, Startup 2 at a cost of $18 per user, and Startup 3 at a cost of $17 per user. Taking the average cost of approximately $17.25 per user as your multiple, using the comparable method you would value your startup at approximately $12.1 million.
Using the information above, you could also determine the revenue multiples for the sale prices of comparable companies. In this example, Startup 1 sold at 5.5x revenue, Startup 2 at 4.95x revenue, and Startup 3 at 5x revenue. Using this range of revenue multiples, you could value your startup anywhere between $11.39 million and $12.65 million.
Because of its versatility, the comparable method is a very popular method for valuing startups as well as small, medium, and large businesses, public and private alike.
Another market-based startup valuation method is the risk factor summation (RFS) method.
To determine a risk factor summation valuation, you first need to determine the average pre-money valuation (value before investment) of similar startups at the same stage of development. Comparable companies should be as similar as possible, operating in the same industry, sector, and region.
Next, you will need to assess how your startup compares to similar startups on 12 risk criteria. Does your startup have higher or lower risk than comparable companies when they were funded? The 12 risks assessed in the risk factor summation method include:
- Management Risk
- Stage of Business Risk
- Legislation/Political Risk
- Manufacturing Risk
- Sales and Marketing Risk
- Funding Risk
- Competition Risk
- Technology Risk
- Litigation Risk
- International Risk
- Reputation Risk
- Exit Risk
You should assess each risk factor on a scale of -2 to +2, where:
- +2 = Very Low Risk
- +1 = Low Risk
- 0 = Normal Risk
- -1 = High Risk
- -2 = Very High Risk
Finally, you will need to adjust the average pre-money valuation of comparable startups by the level of risk. Although the amount you will adjust your valuation will depend on your industry and sector, a commonly accepted standard is:
Very Low Risk = +$500,000
Low Risk = +$250,000
Neutral Risk = +/-$0
High Risk = -$250,000
Very High Risk = -$500,000
A risk factor summation valuation may look something like this:
Caption: The Risk Factor Summation Method of startup valuation requires you to weigh your startups risks along 12 criteria. It then begins with the average pre-money valuation and adjusts this valuation up or down according to your risk factors.
While the risk factor summation method relies on subjectivity and may not be the most accurate method overall, one of the benefits of RFS valuation is that it forces startups and investors to assess and account for the many risks that startup companies are subject to.
Another method of startup valuation is the scorecard valuation method. A scorecard valuation is determined by comparing your startup to similar angel-funded startups at the same stage of development and adjusting the median valuation to the strengths and weaknesses of your startup.
Here is how it works:
First, you will need to determine the average pre-money valuation (value right before investment) of similar startups at the same stage of development. Comparable companies should be as similar as possible, operating in the same industry, sector, and region.
Several national reports, such as the Angel Funders Report by the Angel Capital Association are available to help find comparable companies and determine the median pre-money valuation of similar startups.
Next, you will need to adjust the median pre-money valuation of similar startups to the strengths and weaknesses of the startup. The factors that are considered in the scorecard method include:
- Strength of the Entrepreneurs/Team: 0-30%
- Size of the Opportunity: 0-25%
- Product/Technology: 0-15%
- Strength of the Competition: 0-10%
- Sales and Marketing: 0-10%
- Need for Additional Investment: 0-5%
- Other Factors: 0-5%
While these rankings are subjective, notice the factors that investors weigh as most important: the startup team and the size of the opportunity. As long as there is a sizable market opportunity, a great team can fix a flawed product or service, but a great product cannot make up for an inexperienced team or one that is chasing an insufficient market opportunity.
A scorecard valuation may look like the example below. Each criterion is assessed and weighed to determine an approximate startup valuation. According to the scorecard below, the startup assessed would be valued at 1.075 (or 7.5% higher) than the average pre-money valuation of comparable startups’ pre-money valuations.
Caption: The Scorecard Method of startup valuation bases its valuation on an assessment of how you compare to other startups. Each criteria is weighted and compared to come up with a weighted comparison for your startup’s valuation compared to other startups pre-money valuations.
There are a number of additional startup valuation methods that assess a startup via various criteria, one example of which is the Berkus Method. Additional methods, such as the cost-to-duplicate method and the adjusted net asset method, may also be useful at determining the rock bottom, or minimum value, of your startup.
The Berkus Method is a criteria-based method developed by angel investor and VC David Berkus in the early 1990s that evaluates five key value indicators as the basis for startup evaluation and assigns a value of $0 to $500,000 to each. The startup’s pre-money valuation is then calculated by adding together these totals.
The five areas assessed by the Berkus method include:
- Sound Idea
- Quality Management Team
- Strategic Relationships
- Product Rollout/Sales
The Berkus Method was developed as a simple way to assess the value of pre-revenue startups. According to David Berkus, the Berkus Method was “created specifically for the earliest stage investments as a way to find a starting point without relying on the founder’s financial forecasts.”
In reality, these five key value indicators evaluate the risk associated with the startup, whereas the majority of other valuation methods rely on forecasted financial projections. Entrepreneur’s financial projections are well known to include overly optimistic assumptions about revenue, growth, and profit margins.
While the Berkus Method originally called for a maximum value of $2.5 million (up to $500,000 each across five categories), the method itself is meant to be flexible. The rule of thumb is to adjust the assigned value according to an appropriate benchmark based on startup valuations at the same stage and within the same industry, sector, and geographical area.
For example, if the average valuation for similar startups in your region is $5 million, you would assign values of $0 to $1 million to each of the five key indicators.
Caption: The Berkus Method for startup valuation bases a startups value on these 5 key value indicators.
Since the Berkus Method derives startup value based on these principal risks, one way to increase startup value is to reduce these risks.
One drawback of the Berkus Method is that it weighs each of these criteria the same in terms of importance. However, angel investors and venture capitalists consider the entrepreneurial team and size of the opportunity as some of the most important factors in valuing a startup.
As its name suggests, the cost-to-duplicate method bases startup valuation on what it would cost to duplicate the venture.
The cost-to-duplicate valuation method is based on the notion that a startup is not worth more than it would cost to rebuild the venture from scratch. This, of course, requires more than just the cost of duplicating physical assets.
When determining the value of a startup using the cost-to-duplicate method, you also need to account for costs such as research and development, development time, the costs of building prototypes, as well as costs associated with user and customer acquisition and retention.
One drawback of the cost-to-duplicate method is that it does not take into account several important assets, including brand value and other intangible assets. The cost-to-duplicate method also fails to account for future earnings and profitability, basing its sole valuation on the cost to rebuild the venture.
Because the cost-to-duplicate method often undervalues the true value of a startup, it is often seen as the minimum or starting point in determining the value of a startup.
The asset valuation method simply values your startup by its total net assets. This is the book value of your startup and should equal owner’s equity on your balance sheet.
To calculate the asset valuation of your business, you simply subtract your liabilities from your assets with the following formula:
Asset Valuation = Assets − Liabilities
For example, if the assets your startup owns are valued at $100,000 and you owe $40,000 in liabilities, the asset-based value of your business would be $60,000.
Asset valuation is known as book value. It is the simplest calculation of business valuation and can be taken right from your financial statements.
Adjusted Net Asset Method
The adjusted net asset method is another valuation method that can be used to value your startup. The adjusted net asset method reflects a liquidation price, or the price that you might get in the real world if you stripped your startup down and sold the pieces individually.
To calculate the adjusted net asset valuation, you will need to go through the assets and liabilities on your balance sheet one by one and determine if the values of your assets or liabilities need to be adjusted to reflect real-world value. This can be done with the following formula:
Assets reflected on the balance sheet such as inventory and accounts receivable may have to be reconciled with the actual fair market value. Inventory may have aged or have a long turnaround time, decreasing fair market value. Or a portion of the accounts receivable may default and not be able to be collected, decreasing their value as well.
On the liabilities side, contractual liabilities such as leases may not show up as liabilities on the balance sheet but would have to be settled upon the sale of your business and will have to be adjusted accordingly.
To calculate the adjusted net asset valuation, you will need to carefully examine your balance sheet for assets and liabilities for which the book value does not reflect their real-world values.
The adjusted net asset valuation is the liquidation price of your startup and should be considered the rock bottom price.
Frequently Asked Questions
What is the best method to value a startup?
There is no single best valuation method for all startups. Not all valuation methods are right for every type of business. In many cases, several methods of valuation are considered. The type of valuation methods you should use depends on a number of factors including the startup’s stage, the industry, sector, level of risk, and more.
How do you value a pre-revenue startup?
Valuing a pre-revenue startup is much more complicated than valuing an existing business. Without revenue and earnings, pre-revenue startup valuations tend to rely on
- Projected revenue and profits
- Comparable startups in the market
- Other criteria-based factors
The most popular approaches to value a pre-revenue startup include the venture capital method, First Chicago Method, comparables method, risk factor summation method, scorecard valuation method, and the Berkus Method.
How do you value a startup with revenue?
Valuing a startup with revenue that is still growing is similar to valuing a pre-revenue startup. While revenue does show traction, growth, revenue, and profit projections are still relied on to forecast future earnings and startup value.
Popular approaches to value a startup with revenue also include the venture capital method, First Chicago method, comparables method, risk factor summation method, scorecard valuation method, and the Berkus Method, as well as other multiples driven approaches.
What is a pre-money valuation of a startup?
A pre-money valuation is the valuation of a startup before it receives a round of investment or other outside funding.
What is a post-money valuation of a startup?
A post-money valuation is the valuation of a startup after it receives a round of investment or other outside funding. The post-money valuation can be determined by adding the pre-money valuation and the investment with the formula below.
Post-Money Valuation = Pre-Money Valuation + Investment