Valuation for startups
1) Berkus method
Valuation based on the assessment of five key success factors
-
a) sound idea (basic value)
-
b) prototype (reducing technology risk)
-
c) quality management team (reducing execution risk)
-
d) strategic relationships (reducing market risk)
-
e) product roll out or sales (reducing product risk)
This method is meant for pre – revenue start-ups ie valuing early stage investment
There are many ways to project the value of a company for purposes of pricing an investment, but as rely upon the revenue and profit projections of the entrepreneur as, a, starting point. Discount those projections according to some set percentage or by assigning weight to elements of the enterprise
In business your aim is to establish an, early, more often pre – revenue valuation to start up that has potential of reaching over one decided target
Start up valuation must be kept at a low enough amount to allow for the extreme risk taken by the investor and to provide some opportunities for the investment to achieve a ten times increase in value over it’s life
The pre money value is your current value. And their investment amount is postmoney value. Divide that into the investor total investment and that, will determine the postmoney percentage of ownership .
The risk factor summation method compares 12 elements of the target startup to what could be expected in a fundable and possibly profitable
Business owner want high startup value while investors low value
Startup business will usually have low or no revenue/profit and in a stage of instability
EBITA = net profit + interest + taxes + depreciation + amortisation (gradually writing of initial cost)
Startup value positive factors
1) Traction
2) Reputation
3) Prototype
4) Revenues
5) Supply & Demand
6) Distribution channel
7) Hotness of industry
Startup value negative factors
1) Poor industry
2) Low margins
3) Competition
4) management not up to scratch
5) product
6) desperation
Startup funding stages
1) seed funding
2) round A Funding
3) round B funding
4) Debt funding
5) mezzanine financing and bridge loans
6) leveraged Buyout
7) initial public offerings (IPO)
Importance of startup valuation
Likeness of investors
Reliable past performance & predictable future performance
Future potential of company
Startup valuation consideration
Knowledge of other businesses in industry
Geographic location
Risk assessment factors of
1) Management
2) Market
3) Science & technology
4) Financial/Funding phase
Venture Capital Method
It reflects the process of investors, where they are looking for an exit within 3 to 7 years
Method, developed by prof Bill Sahlman at Harvard Business School in 1987
Showing the pre-money valuation of pre-revenue startup
Return on Investment (ROI) = Terminal value + Post-money valuation
Terminal value is the startups anticipated selling value in the future, estimated by using reasonable expectation for revenues in the year of scale and estimating earnings
Scorecard valuation method
It uses the average pre-money valuation of other seed/startup businesses in the area, and then judges the startup that needs valuing against them using a scorecard in order to get, an accurate valuation
The first step is to find out the average pre-money valuation of the pre-revenue companies in the region and business sector of the target startup
The next step is to find out the pre-money valuation of pre-revenue companies using the scorecard method to compare
The scorecard is as follows
1) Strength of Management team – 30%
2) Size of the opportunity – 25%
3) Product/Technology – 15%
4) Competitive Environment – 10%
5) Marketing/Sales channels/Partnerships – 10%
6) Need of additional Investment – 05%
7) Other – 05%
The final step is to assign a factor to each of the above qualities based on the target startup and then to multiply the sum of factors by the average pre-money valuation of pre-revenue companies
This worksheet provides the investor with a basis for deciding if a startup company should be valued near the top or bottom of the range of values that might reasonably be applied to such an early stage venture
No two angel investors will value a company (or business plan) the same, however, with some practice, this worksheet will allow investors to compare one company to the next and assist the angel in deciding if a company’s valuation should be near the high end of a reasonable range in valuation or, on the other hand, near the bottom of the range of valuations
Ideas for doing business with ease & for enhancement
1) Meet new people seriously
2) Keep a pen pointing journal
3) Tap into your interest
4) Explore new way of thinking
5) Travel
6) Go online digital market
7) Do market research
8) Tax preparation & book keeping
9) Figure out problems to be solved
10) Find your market
11) Find your support
12) Create financial market & plan phase wise
13) List out capital source
14) Stay positive
15) Analysis of relevant market
16) Note down ideas and expand
17) Carry out competitive analysis
18) Understanding of your customers
19) Understand your competition
20) Build customer relationship
21) Maintain supplier relationship
22) Deta Bank
23) Value addition
24) Volume discount mentality
25) Policy of what next and not why fail
26) Production substitute policy
27) Easy availability
28) Dumping inventory
29) Locational preferance
30) Develop and Maintain Brand & Goodwill
31) Risk factor summation
32) No compromise to quality
33) Logical orgue
34) e market
35) SWOT analysis
Risk factor summation method
It compares 12 elements of the target startup to what could be expected in a fundable and possible profitable seed/startup using the same average pre-money valuation of pre-revenue startups in the area as scoresheet method
1) Management
2) Stage of business
3) Legislation/political risk
4) Manufacturing risk
5) Sales & marketing risk
6) Funding/capital raising risk
7) Competition risk
8) Technology risk
9) Litigation risk
10) International risk
11) Reputation risk
12) Potential lucrative risk
Each element is, assessed as follows
1) +2 – very positive for growing the company and executing a wonderful exit
2) +1 – positive
3) 0 – neutral
4) -1 – negative for growing the company and executing a wonderful exit
5) -2 – very negative
The average pre-money valuation of pre-revenue companies in your region is adjusted positively or negatively as, per element assessment
Cost-to-duplicate Method
This, approach involves looking at the hard assets of a startup and working out how much it would cost to replicate the same startup business somewhere else. The idea is that an investor wouldn’t invest more than it would cost to duplicate the business
If you wanted to find out cost-to-duplicate a software business, you would look at the labour cost for programmers and the, amount of programming time that has been used to design the software
The big problem with this method is that it doesn’t include the future potential of the startup or intangible assets like brand, value, reputation or hotness of the market
This method is often used as, a lowball estimate of company value
Discounted Cash Flow (DCF) method
This method involves how much cash flow the company will produce and then calculating how much that cash flow is worth against an expected rate of investment return
A higher discount rate is then applied to startups to show the high risk that the company will fall as its just starting out
This method relies on a market analysts ability to make good assumptions about long term growth which for many startups becomes a guessing game after a couple of years
Valuation by stage
This method is often used by angel investors and venture capital firms to come up with a quick range of startup valuation
Various stages of funding to decide how much risk is still present with investing in a startup
The further along a business is along the stages of funding the less the present risk
A valuation by stage model
1) estimated company value Stage of development
2) has an existing business idea of business plan
3) has a strong management team a place to execute on the plan
4) has a product or technology prototype
5) has strategic alliances or partners or signs of a customer base
Startups with a business plan will receive a small valuation, but that will increase as they meet developmental milestones
Compiled by
Avinash Kulkarni
Chartered Engineer
Govt Approved Valuer
Regd Valuer
Valuation for startups