Start up valuation

• Several startup valuation methods are available for use by financial

analysts. Below, we will discuss some popular methods used for
valuing startups.
• Startups, in the most general sense, are new business ventures
started up by an entrepreneur.
• They usually tend to focus on developing unique ideas or
technologies and introducing them into the market in the form of a
new product or service
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 • The various methods through which the value of a startup is
determined include the
• (1) Berkus Approach,
• (2) Cost-To-Duplicate Approach,
• (3) Future Valuation Method,

• (4) Market Multiple Approach,

• (5) Risk Factor Summation Method
• (6) Discounted Cash Flow (DCF) Method.
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 Berkus Approach
• The Berkus Approach, created by American venture capitalist and angel investor 
Dave Berkus, looks at valuing a start-up enterprise based on a detailed
assessment of five key success factors: (1) Basic value, (2) Technology, (3)
Execution, (4) Strategic relationships in its core market, and (5) Production and
consequent sales.
• A detailed assessment is carried out evaluating how much value the five key
success factors in quantitative measure add up to the total value of the
enterprise.
• Based on these numbers, the startup is valued. The Berkus Approach may
sometimes also be referred to as “the Stage Development Method or the
Development Stage Valuation Approach.”

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 Cost-to-Duplicate Approach
• The Cost-to-Duplicate Approach involves taking into account all costs and
expenses associated with the startup and the development of its product,
including the purchase of its physical assets. All such expenses are taken into
account in order to determine the startup’s fair market value based on all the
expenses. The cost-to-duplicate approach comes with the following drawbacks:
• Not taking into consideration the company’s future potential by running
projection statements of its future sales and growth.
• Not taking into consideration its intangible assets along with its physical assets.
The argument here is that even at a startup stage, the company’s intangibles may
have a lot to offer for its valuation, i.e., brand value, goodwill, patent rights (if
any), and so on.

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 Future Valuation Multiple Approach

• The Future Valuation Multiple Approach solely focuses on

estimating the return on investment that the investors can expect
in the near future, say five to ten years.
• Several projections are carried out for the said purpose, including
sales projections over five years, growth projections, cost and
expenditure projections, etc., and the startup is valued based on
these future projections.

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 Market Multiple Approach

• The Market Multiple Approach is one of the most popular startup

valuation methods. The market multiple method works like most
multiples do.
• Recent acquisitions on the market of a similar nature to the startup
in question are taken into consideration, and a base multiple is
determined based on the value of the recent acquisitions.
• The startup is then valued using the base market multiple.

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 Risk Factor Summation Approach
• The Risk Factor Summation Approach values a startup by taking into quantitative
consideration all risks associated with the business that can affect the 
return on investment.
• An estimated initial value is calculated for the startup using any of the other methods
discussed in this article.
• To this initial value, the effect, whether positive or negative, of different types of business
risks are taken into account, and an estimate is deducted or added to the initial value
based on the effect of the risk.
• After taking into consideration all kinds of risk and implementing the “risk factor
summation” to the initial estimated value of the startup, the final value of the startup is
determined.
• Some types of business risks that are taken into account are management risk, political
risk, manufacturing risk, market competition risk, investment and capital accumulation
risk, technological risk, and legal environment risk 7
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 Discounted Cash Flow Approach

• The Discounted Cash Flow (DCF) Method focuses on projecting the

startup’s future cash flow movements. A rate of return on
investment, called the “discount rate,” is then estimated based on
which it is determined how much the projected cash flow is worth.
Since startups are just starting out and there is a high risk
associated with investing in them, a high discount rate is generally
applied.

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