How to Value Startup - 9 Real World Method used by Venture Capitalist and Angel Investors
Valuing a startup can be tricky, but investors have clever ways to figure it out. In this fun and informative blog post, we'll explore nine methods that investors use to determine a startup's worth. It's like solving a puzzle!
Whether you want to understand how investors decide or dream of starting your own business, this post is for you!
Investors compare a startup to similar ones in the market. For example, if there's a new lemonade stand, they'll check how other lemonade stands are doing to estimate its value. They look at things like sales, growth rate, and market share. This helps them get an idea of how much the new lemonade stand might be worth.
Imagine you're valuing a new pizza delivery startup. To assess its value, you look at other pizza delivery companies in the same area. By comparing factors like their sales, customer base, and market share, you can estimate the value of the new startup.
Investors imagine how much money a startup will make in the future. They consider things like sales and expenses. Then they calculate how much that future money is worth today. It's like predicting how much allowance you'll have next year and figuring out how much it's worth right now.
Suppose you're considering investing in a mobile app development startup. You analyze their projected cash flows over the next five years and apply a discount rate to account for the risk. By discounting the future cash flows back to the present value, you can determine the startup's worth.
Investors look at past deals where similar startups were sold or invested in. They compare those deals to the startup they're valuing.
If you're valuing a tech startup that develops fitness tracking devices, you might look at past acquisitions or investments in similar companies. By examining the purchase prices or investment amounts, you can gauge the potential value of the startup you're evaluating.
Investors think about the risks involved in a startup. They look at things like competition and technology challenges. Then they assign weights to each risk. It's like balancing your bike—some risks are bigger, so they get more weight. This helps investors adjust the value based on how risky the startup is.
Let's say you're assessing the value of a biotech startup working on a new drug. You consider factors like regulatory approvals, competition, and intellectual property protection. You assign weights to each risk factor based on their significance and adjust the valuation accordingly.
Investors compare a startup's sales to other similar startups. They look at how much money those startups make and how much they're worth. If a lemonade stand makes more money than others, it might be worth more too.
Suppose you're valuing an e-commerce startup. You compare its revenue to other similar e-commerce businesses and determine a revenue multiple. For example, if the startup's revenue is $1 million and the average revenue multiple in the industry is 4x, the valuation would be $4 million.
If a startup is already selling shares in the stock market, investors can see how much people are willing to pay for those shares. They multiply the share price by the number of shares to find the value. It's like checking how much people are willing to pay for a toy you own to know its value.
Consider a social media startup that has recently gone public. You multiply the current stock price by the number of outstanding shares to calculate its market capitalization. For instance, if the stock price is $10 and there are one million shares, the market capitalization would be $10 million.
Investors know that startups go through different stages, like starting, growing, or becoming well-known. They value the startup based on which stage it's in. It's like knowing a plant is worth more when it grows into a big tree.
Suppose you're valuing a software-as-a-service (SaaS) startup. You consider its stage of development, such as early-stage with limited revenue but high growth potential. Investors would assign a valuation based on the company's stage, taking into account its product development progress and market traction.
Investors look at the things a startup owns, like equipment or buildings. They add up the value of those things to find the total value of the startup. It's like counting the toys you own to know how much they're worth.
Imagine valuing a manufacturing startup that owns equipment, inventory, and a production facility. You assess the market value of these tangible assets and add them up to determine the startup's asset-based valuation.
Sometimes, investors mix different methods to get a more accurate value. It's like using more than one tool to solve a puzzle. They might use a little bit of each method we've talked about to understand the startup better and find its true value.
Suppose you're valuing a renewable energy startup. Instead of relying solely on one method, you combine elements from different approaches. You might use a combination of discounted cash flow analysis, revenue multiples, and comparable company analysis to arrive at a comprehensive valuation.
As you can see, different people arrive at their startup valuation using various methodologies. The differences, meanwhile, are very negligible—a little bit of a different computation here, a change in perspective there. However, a lot of them evaluate both the financial and human aspects when determining the "worth" of a startup.
So keep in mind: You must take into account both human and financial factors. However, even when you are spending hours and hours on cap tables and computations to value a startup, make sure you never lose sight of the human being. Because your startup's employees are what really make it what it is.
As the founder of a startup, you must a valuation estimate that you can both believe and defend to potential investors. Your long-term capital raising strategy can be created and your funding requests can be kept in perspective with the aid of a precise appraisal.
No single startup valuation technique is consistently correct. To determine a fair value, you'll probably use a variety of approaches and combine strategies. To be sure you're on the right track, don't forget to use company databases.
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