Startup Valuation Methods

Various Methods for valuing a Startup explained.

Startup Valuation Methods

As the name suggests, the valuation of startups is 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 Top Startup Valuation Methods?

The valuation of a startup depends on various factors like; the company revenue model, management, the industry, technology used, and the product and services.

Financial analysts use various methods to find the valuation of a startup. Some of the top startup valuation methods are explained below:

  • EBDITA Formula
  • Venture Capital Method
  • Discounted Cash Flow Method
  • Market Multiple Approach
  • First Chicago Method

EBDITA Formula

You can do the valuation using the EBDITA formula.

The EBDITA method for company valuation is simple and easy.

EBDITA stands for the addition of Earning 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

This is the most used valuation method for pre-revenue startups. If your company has not started generating revenue yet, the venture capital method is 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, where they are looking for an exit within 3 to 7 years.

First an expected exit amount for the investment is estimated. From there, one calculates back to the post-money valuation today taking into account the time and the risk the investors takes.

ROI can be estimated by determining what return an investor could expect from that investment with the specific level of risk attached.

Discounted Cash Flow Method

Investors 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 investment by centering how much revenue it will generate in the future.

startup valuation

startup valuation

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.

Since startups are just starting out and there is a high risk associated with investing in them, a high discount rate is generally applied. Read the discounted cash flow method in detail here.

Market Multiple Approach

This method is considered the most popular among startup valuation methods. The market multiple approach models are used to calculate the worth of a startup based on the sale price of competing startups.

Recent acquisitions of similar startups are also taken into account while calculating the startup value.

First Chicago Method

The first Chicago method is a condition-specific valuation method. Private equity investors and venture capitalists.

Investors and venture capitalists use this method to estimate the fast-growing companies.

As we have already discussed the most favored methods for the valuation of startups, any of the above methods will serve the purpose.However, EBITDA can be preferred for the valuation of startups in India.

Using the EBITDA method, you can track the value of your startup and evaluate it to the valuation of other related businesses.

You need the values for net profit, taxes, interest, depreciation, amortization. However, assigning these values to startups is no easy bread.

For the startups with no taxes, profit, and amortization, you can use other valuation methods like Venture Capital Method, First Chicago Method, Discounted Cash Flow Method, Market Multiple Approach.

How to Estimate your startup Valuation

Startups in their early stage have no or less baseline product, which causes less or no sale.

Although, 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 ensuring these considerations, the investors arrive at the startup’s valuation point, which depends on the company’s present stage and the accomplishments it will earn in the coming years.

It is up to the investors to decide whether they want to invest in the venture. Some investors make investments in early-stage companies with the probability of high risk and high return. Other investors want to invest in the middle level, where there is little to no risk.

Different Sector, Different Valuation Methods

When you talk about evaluating an E-commerce business, look at its historic earning. Meanwhile, for early-stage startups, we select any of the best valuation methods we have discussed that suit your startup structure.

Starters’CFO helps companies in getting their valuation done, Contact us today for your startup valuation.

Valuation of Startups: Know how it is done.

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 got their name in 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.

Saama Capital, Alibaba, Berkshire Hathaway, SAIF are the investors of Paytm.

OYO Rooms:

Oyo Rooms is valued at $9 billion. The main investors in oyo rooms are SoftBank Group, Sequoia Capital India and Lightspeed India Partners.

Ola Cabs:

The ride booking company Ola Cabs is valued at $6.3 billion. Ola has investors like Accel Partners, SoftBank Group and Sequoia Capital in their investor portfolio.

ZOMATO:

Food delivery company, Zomato is valued at $5.4 billion with investors including Sequoia Capital and VY Capital.

Dream11

Dream11 is valued at $5 billion and have investors like 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.

Apart from these above, other notable unicorn Indian startups are

  • Udaan is valued at $ 3.1 billion
  • Razorpay is valued at $3 billion
  • Pine Labs is also valued at $3 billion
  • delhivery is valued at $3 billion
  • Policybazaar is valued at $2.4 billion
  • CRED at $2.2 billion,
  • FirstCry at $2.1 billion,
  • Meesho at $2.1 billion,
  • 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
  • Lenskart is valued at $1.5 billion,
  • Five Star Business Finance at $1.4 billion,
  • Rivigo at $1.07 billion,
  • Snapdeal at $1 billion.

How Starters’ CFO Can Help With Startup Valuation?

You may ask your accountant or business advisor to value your company. It could be a wonderful decision. Valuing a matured company with good turnover and managed finance records is safe as compared with the valuation of 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.

For valuing your company, you can consult with a Registered Valuer. Being a certified valuer, they can do your company valuation more professionally.

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.