Startup Valuation — The Ultimate Guide to Value

Startups 2020
Pro Business Plans Follow
Sep 17, 2019 · 6 min read

Last Updated: 5/11/2020

The rise of entrepreneurship has given birth to one of the most widely employed terms
in the history of business and finance: ‘startups’. A startup is basically a little baby
business that began with an idea and it is now looking for capital to grow and mature.

Startups, pretty much like babies, need money to expand themselves, test ideas and
develop a team. To raise money, a startup needs to be valued and therefore,
understanding how the startup valuation process works is very important for any serious
and committed entrepreneur.

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Business Venture from Seed to Series-A

Why is it important to estimate the value of a startup?

Venture capital firms and individual investors have dozens of models to value a startup,
ranging from the easiest ones to the most complex ones that involve several qualitative
variables and statistical analysis. Some of the most common startup valuation models
include:

Venture Capital Method

A startup valuation that employs a forecasted terminal value for the startup and an
expected return from the investor (often stated as 10X, 8X, and so on), to determine pre-
money and post-money valuations. The Venture Capital Method’s formula is:

Pre-Money Valuation = Post Money Valuation — Invested Capital

With the Post-Money Valuation being the terminal value divided between the expected
return.

Let’s say an investor values your startup at a terminal value of $1,000,000 and he wants
a 20X return on his $10,000 investment. In this case, your Post-Money valuation would
be $50,000. And, according to the Venture Capital Method, the Pre-Money Valuation
would be:

Pre-Money = $50,000 — $10,000 = $40,000

Berkus Method
A straightforward method that values startups based on five key aspects, giving each
aspect a certain amount of money

Qualitative element to be considered Value

Sound Idea

Prototype

High-Quality Management Team

Strategic Relationships

Product Rollout or Sales Made $500,000 each.

A technical tool employed by financial analysts to determine the value of a business by
estimating its future cash flows, discounting them at a certain discount rate to obtain
their present value. The sum of these discounted cash flows will be the resulting
valuation for the startup. Given the fact that this method relies heavily on assumptions
that require some historical data to be performed, it is not the most widely employed to
value startups.

Comparables Method
This approach employs referential information and numbers from other similar
transactions to estimate the value of a startup. Let’s say that a similar app to the one
developed by the startup was recently valued by a venture capital firm at $5,000,000
and the app had 100,000 active subscribers/users. This means that the company was
valued at $50 per user. An investor could use this benchmark to value a startup with a
similar app.

Valuation by Multiples Method

For startups that have already made some money and are showing profits, the Valuation
by Multiples method is one of the most widely employed. Let’s say your startup is
generating an EBITDA of $250,000. Depending on the industry you are in, your
competition, your management team, and some other qualitative aspects, an investor
could tell you that he’s valuing your business at say 5X, 10X or 15X your current EBITDA.
This is a powerful and simple valuation tool that investors employ to quickly estimate the
value of a more mature startup.

Other popular valuation models include the Scorecard Model, the Book Value Method
and the First Chicago Method.

Picking the right method for your stage

Startups have different stages they go through since the moment the idea comes up until
the point at which the company has matured to a fully-operational corporation. Each of
these startup valuation models can be more useful for some stages than others and you
need to determine in which stage you are in before you pick the method that is best
suited for you. Here’s a list of the four common stages of startups:
Seed Stage

Valuation for Seed Stage Companies

The earliest of the stages for any startups. At this point, there’s usually no revenue, no
assets, no team, no business. Just an idea and the willingness to move forward. At this
point, the Berkus Method or even the Venture Capital Valuation Method may be the
most recommended for you.

Speak with a professional to discuss your Startup Valuation at Pro Business Plans for free.

Round A Stage
Your startup is now a solid idea on the move. You probably have a beta product or a
prototype by now or you have already made some sales. At this point, you can rely on
more technical methods such as the Cost-to-Duplicate method or yes, the Venture
Capital Method again. Keep in mind that what you’ve done so far is not necessarily a
good indication of what’s coming, so make sure you don’t undervalue your business by
using current figures as if they were the ultimate performance indicator of your startup.

Round B Stage
At this point what you need is money to expand and continue growing. The business
model is already proven (to some extent) by now, and your revenue-generation potential
can be assessed. You can now incorporate some startup valuation models that rely
heavily on financial data to come up with a number. These methods include the DCF
Model and the Valuation by Multiples Model.

There are some other advanced stages that are closer to an IPO, but given the fact that
getting to those stages require some major advance and advisory, you may not need this
guide at that point, investment bankers and advisers will probably do a great job at
valuing the business at those stages.

How much can I expect to raise on each stage?

That depends on several factors including your network, your ability to draft a
persuasive pitch deck and the soundness of your idea/business model. Nevertheless, you
could expect to raise an amount close to the following ranges:

· Seed Stage: From $250,000 to $2,000,000

· Round A Stage: From $2,000,000 to $15,000,000

· Round B Stage: From $15,000,000 to $50,000,000

Bottom Line
Startup valuation models are mere approximations. There’s no perfect way to value a
business that has next to nothing. Nevertheless, the methods and details presented in
this article can give you a clear idea of what you could expect and what you should be
asking for your startup.

Signup for a free webinar: Raising Capital for Your Startup: How to Raise Money for your
Business Venture from Seed to Series-A

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 Startups

A startup can only go far when it has enough capital to fully develop its underlying idea
or concept. A startup without money is destined to fail and therefore, raising capital for
your startup is one of the most important tasks you may find yourself invested in,
alongside with growing the technical side of the business.

You need money for marketing, office space, prototype development, to hire staff, for
inventory and a dozen more things and estimating the value of your startup is the only
way you’ll be able to pitch your idea to an investor whose first question will be: How
much does it worth?

Signup for a free webinar: Raising Capital for Your Startup: How to Raise Money for your
Business Venture from Seed to Series-A

Which are the most popular valuation models for startups?

A VC Reveals the Metrics They Use to Evaluate Sta…

Sta…
For each feature the startup possesses in full, the valuation should go up by $500,000.
Nevertheless, depending on the degree in which each element is developed the investor
could reduce the value of the item to say $400,000 or $250,000, to determine the final
value.

. . .

Signup for a free webinar: Raising Capital for Your Startup: How to Raise Money for your
Business Venture from Seed to Series-A

Cost-to-Duplicate Method
This startup valuation method requires some heavy due diligence, as its main goal is to
determine how much it would cost to start the same business from scratch. The cost-to-
duplicate method is a very realistic approach that puts into question the competitive
advantages of a startup. If the cost of duplicating the startup is very low, then its value
will be next to nothing. In turn, if it is costly and complex to replicate the business
model, then the value of the startup will increase as the difficulty increases.

Discounted Cash Flow Model (DCF)

How to value a company using discounted cash …