Valuation of a startup company is important to understand a company’s growth potential and ability to bring in new capital and meet customer and investor expectations. In today’s landscape, there are over 1,400 unicorns around the world—those in startups valued at 100 crores or more. Whereas decacorns were seen to be valued at INR 1000 crores and even hectocorns valued more than INR 8 lakhs, like SpaceX and ByteDance.

These eye-popping numbers do not make up the valuation of startups in India an easy process. Factors such as the founding team’s expertise, product viability, market opportunity, assets, and competitive landscape play a significant role while determining the startup company’s valuation. Financial data is important for any startup company that is generating revenue, as it provides data that is more tangible.

All angel investors and venture capital firms employ a number of startup company valuation models to determine the pre-money value of a startup company, or its worth prior to being funded. As you get ready for funding rounds for your company, it’s important you understand what the different methods are used in evaluating a company’s potential. Therefore, in this article, we’ll walk you through key startup company valuation methods that will enable you to have the relevant discussions with investors and know what your startup company is really worth.

Top 5 Methods of Valuation of Startups in India

1. Cost To Duplicate Method

The cost of the duplicate method, as the name suggests, calculates the cost of recreating the startup company from the ground up. Mostly, this method estimates a market value for physical assets, which include equipment and infrastructure. For a software company, the valuation would be based on the total cost of programming hours, whereas for a high-tech startup, it would include expenses like research and development, patent protection, and prototype building.

This method provides an objective starting point but often devalues startups. It fails to consider the future revenue potential of the company, its value as a brand, or other intangible assets such as intellectual property and customer relationships. For example, it might cost INR 7 crores to duplicate the physical assets of a high-tech firm, but the true value may be far higher when considering the company’s future earnings potential and market positioning. Therefore, the cost-to-duplicate approach is often used as a ‘lowball’ estimate.

2. Market Multiple Method

The market multiple approach is attractive to venture capital investors because it offers a startup company valuation benchmark based on the recent acquisitions of similar companies. For example, if mobile app companies are selling for 5 times their annual revenue, a similar startup company could also be worth 5x revenue, risk adjusted, or development stage adjusted. If the mobile app startup has generated INR 16 crores in annual revenue, it might be valued at around INR 80 Crore based on a 5x multiple.

This method provides a good sense of what the market is willing to pay, but there are limitations. In the early stages of startup, it can be hard to find comparable companies, especially when they don’t tend to share details of private deals. The market multiple method depends on the availability of accurate transaction data, which is frequently missing for small, unlisted startups.

3. Discounted Cash Flow (DCF) Method

Discounted Cash Flow (DCF) method is applied by startups with no significant revenue generation. DCF is the forecasting of the company’s future cash flows and then discounting them to their present value using an expected rate of return. Because of the inherent risks, startups are typically assigned higher discount rates, as high as 20% to 30% or more.

However, DCF is very sensitive to the accuracy of long-term forecasts. For example, a projected cash flow of INR 40 crores five years from now can easily change based on the assumptions made about the startup’s rate of growth, competition, and market conditions.

It is especially useful for startups in capital-intensive industries like clean energy or biotechnology, where cash flows are delayed but substantial. Consider an example: a cleantech startup company that projects cash flows of INR 830 crores over 10 years, under which a 25% discount rate would give a present value of around INR 200 crores.

4. Valuation By Stage

The valuation by stage method is a quick, rule-of-thumb valuation of startups in India that is based on how far the startup company is along in its development. This approach is often used by angel investors and venture capitalists to assign rough values at different stages of the startup lifecycle:

●  INR 2 crore to INR 4 crore: The company has a good business idea or plan.

●  INR 4 crore to INR 8 crore: The plan is being executed by a strong management team.

●  INR 8 crore to INR 16 crore: The startup has reached a prototype of a final product or technology.

● INR 16 crore to INR 40 crore: There are strategic alliances or the beginnings of a customer base.

● INR 40 crore and above: The company has clear revenue growth and a route to profitability.

Suppose a startup company has a prototype product and an early partnership—that could be between INR 16 crore and INR 25 crore. The valuation will increase to INR 40 crore or more as the company crosses revenue milestones or is showing a growing customer base. In fact, startups like Uber and Airbnb rapidly scaled their valuations upwards from INR 40 crore to INR 1000 crores within just a few years after they built a strong customer base and strategic partnerships.

This is also followed by many private equity firms by tying funding rounds to specific milestones. An example where an initial INR 8 crore round is allocated for product development, with subsequent funding rounds tied to other milestones such as launching the product or finding early customers.

5. Risk Factor Summation Method

The Risk Factor Summation Method refines the startup company valuation by adjusting for specific risks. Starting with an initial startup company valuation, you modify the value based on 12 risk factors, with adjustments made in INR 2 crore increments.

●  Double-Plus (++): Low-risk factor, add INR 4 crore.

●  Plus (+): Moderate risk, add INR 2 crore.

●  Double-Minus (–): High-risk factor, subtract INR 4 crore.

●  Minus (-): Moderate risk, subtract INR 2 crore.

For example, if your online store starts with a INR 16 crore valuation:

●  Competition Risk: Low risk; add INR 2 crore (+).

●  Management Risk: Strong team, add INR 4 crore (++).

●  Sales & Marketing Risk: High risk; subtract INR 4 crore(–).

This results in an adjusted valuation of INR 18 crore.

Conclusion

Valuing a startup is both an art and a science, requiring a careful balance of objective data and forward-looking potential. From the Cost-to-Duplicate method to the Risk Factor Summation, each approach offers unique insights that cater to different stages and types of startups. The key is to understand which method best aligns with your company’s current position and future potential.

You’re in the early stages of raising capital or preparing for a significant round of funding, having a clear understanding of your startup company valuation is essential. Investors look for well-founded numbers, but they also invest in the potential and vision your startup represents. By mastering the valuation process, you position yourself to negotiate better deals and make informed decisions that drive long-term growth.

If you’re ready to take the next step in determining your startup’s value, Starters’ CFO is here to guide you through the process. Our team of financial experts specialises in helping startups like yours navigate the complexities of fundraising and financial planning.

Get in touch today and let us help you unlock the full potential of your startup’s valuation!