Startup Valuation Methods
SCFO- Jul 22, 2021
- Startup
As the name suggests, startup valuation involves measuring the value of the venture and assessing its worth.
You can also explain it this way; by doing the valuation of startups, you can determine how much it would cost to launch a company similar to the companies you are valuing.
What are the Top Startup Valuation Methods?
The valuation of a startup depends on various factors such as the company’s revenue model, management, industry, technology used, and the products and services offered.
Financial analysts use various methods to determine the valuation of a startup. To provide clarity, here are some of the top startup valuation methods, explained below:
- EBDITA Formula
- Venture Capital Method
- Discounted Cash Flow Method
- Market Multiple Approach
- First Chicago Method
EBDITA Formula
You can calculate the valuation using the EBITDA formula.
Additionally, the EBDITA method for company valuation is simple and easy to understand.
EBDITA stands for the addition of Earnings before interest, taxes, depreciation, and amortization.
(Earning before interest+taxes+depreciation+amortization)
Now, when you already have the EBDITA, you can find your enterprise value using the below formula.
Startup Value= [market capitalization + debt value + preferred shares + minority interest] – [cash with cash equivalents]
Venture Capital Method
Investors commonly use the venture capital method to value pre-revenue startups.
The venture capital method is the most commonly used valuation method for pre-revenue startups. Therefore, if your company has not started generating revenue yet, this approach is ideal for you.
When an investor invests in your business, he or she evaluates its value and strength. Here, the venture capital method approach represents the investor’s point of view.
The venture capital method reflects the process of investors. Typically, they are looking for an exit within 3 to 7 years.
First, we estimate the expected exit amount for the investment.
Then, one calculates back to the post-money valuation today, considering the time and the risk the investors take.
To estimate ROI, an investor can first determine the expected return from that investment.
ROI can be estimated by first determining what return an investor could expect from that investment. This involves considering the specific level of risk attached to it.
Discounted Cash Flow Method
Investors typically approach this valuation method to measure the value of an investment based on its projected potential cash flow.
The discounted cash flow method determines the current worth of an investment by focusing on how much revenue it will generate in the future.
Where;
r is discount rates,
CF stands for given year cash flow value,
CF1 is for one year,
CF2 is for two years, and CFn is for additional years.
Investors generally apply a high discount rate when investing in startups due to the high associated risk.
Read the discounted cash flow method in detail here.
Market Multiple Approach
Startups commonly favor this method, making it the most popular among startup valuation methods. Moreover, analysts utilize the market multiple approaches to determine a startup’s value by considering the sale prices of competing startups.
We also take recent acquisitions of similar startups into account when calculating the startup value.
First Chicago Method
The first Chicago method is a condition-specific valuation method. Private equity investors and venture capitalists.
Furthermore, investors and venture capitalists use this method to estimate fast-growing companies.
Since we have already discussed the most favored methods for the valuation of startups, any of the above-mentioned methods will serve the purpose.
However, startups in India may prefer using EBITDA for valuation.
By using the EBITDA method, you can effectively track the value of your startup and, consequently, assess its valuation in comparison to other related businesses.
You need the values for net profit, taxes, interest, depreciation, and amortization. However, assigning these values to startups is no easy bread.
For startups with no taxes, profit, or amortization, you can explore other valuation methods. These methods include the Venture Capital Method, First Chicago Method, Discounted Cash Flow Method, and Market Multiple Approach.
How to Estimate Your Startup Valuation
Startups in their early stage have no or fewer baseline products, which causes less or no sales.
However, investors look at some point to validate a startup for valuation.
Whether the founders have skill sets, to bring the change for scaling a successful business.
Whether they are developing novel and less competitive products or services. The size of the market for your product/service to scale in.
After carefully considering these factors, investors then determine the startup’s valuation, primarily depending on the company’s current stage and the achievements it is expected to attain in the future.
Investors have the choice to invest in the venture. Some opt for early-stage companies, taking on high risk with the potential for high returns. Conversely, others prefer middle-level investments, where the risk is minimal to none.
Different Sector, Different Valuation Methods
When you talk about evaluating an E-commerce business, look at its historic earnings. Meanwhile, for early-stage startups, we select any of the best valuation methods we have discussed that suit your startup structure.
https://www.youtube.com/watch?v=9FrreHFcjPM
Some of the Most Valued Startups in India?
India has the world’s third-biggest startup ecosystem. In India, there are over 35 startups with a combined value of more than Dollars of 80 billion. As per the Venture Intelligence Startup Tracker, the following companies have their name on the list.
Byju’s:
Byju’s is India’s most valuable unicorn startup with a valuation of $16.5 billion.
Paytm:
Vijay Shekhar Sharma founded it in 2010, which is now worth $16 billion. With a valuation of around $7 billion, Paytm joined the startup unicorn club in the year 2015.
Moreover, Saama Capital, Alibaba, Berkshire Hathaway, and SAIF are the investors of Paytm.
OYO Rooms:
Oyo Rooms holds a valuation of $9 billion, with primary investments coming from SoftBank Group, Sequoia Capital India, and Lightspeed India Partners.
Ola Cabs:
The ride-booking company Ola Cabs is valued at $6.3 billion, with investors such as Accel Partners, SoftBank Group, and Sequoia Capital in their investor portfolio.
ZOMATO:
Furthermore, the food delivery company Zomato is valued at $5.4 billion, with investors including Sequoia Capital and VY Capital.
Dream11
Additionally, Dream11 is valued at $5 billion and boasts investors such as Kaalari Capital, Tencent Holdings, and Steadview Capital.
Swiggy:
Another food delivery startup, Swiggy, is valued at $5 billion and its investors include Accel India, SAIF Partners, and Norwest Venture Partners.
In addition to the above, other notable unicorn Indian startups include:
- Udaan is valued at $ 3.1 billion
- Furthermore, Razorpay is valued at $3 billion
- Pine Labs is also valued at $3 billion
- Delivery is valued at $3 billion
- Furthermore, Policybazaar is valued at $2.4 billion
- CRED at $2.2 billion,
- Furthermore, FirstCry at $2.1 billion,
- Meesho at $2.1 billion,
- Furthermore, Sharechat is also valued at $2.1 billion.
- Unacademy is valued at $2 billion,
- Urban Company is valued at $2.1 billion,
- BillDesk at $1.9 billion
- Furthermore, Lenskart is valued at $1.5 billion,
- Five Star Business Finance at $1.4 billion,
- Rivigo at $1.07 billion,
- Furthermore, Snapdeal at $1 billion.
How Starters’ CFO Can Help With Startup Valuation?
You may consider asking your accountant or business advisor to value your company; this could be a wise decision. Valuing a matured company with good turnover and well-managed financial records is generally safer than valuing startups.
Although selecting someone for valuing your company should include the track records for the successful valuation they have done, concentrate on the outcomes they have accomplished and the testimonials they will provide you.
It is incredibly difficult to assess an exact valuation for an organization in the initial phases when its performance or loss is unknown. You should not approach a regular CA, accountant, or market analyst who can give you an estimation of the value only of your venture.
To value your company effectively, consider consulting with a Registered Valuer. Additionally, as certified valuers, they can conduct your company valuation more professionally and comprehensively.
Starters’ CFO is a team of certified valuers and chartered accountants. We have served many big names for their company valuation.
We know which valuation method is appropriate for a business like yours. Let’s Connect with us here.