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Valuation of Startups : Methods & No Nonsense guide to startup Valuation

valuation of startups
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We are about to discuss the best method for the valuation of startups. Before we discuss more on this topic, let’s understand what the valuation of the startup is.

The valuation of startups, as the name suggests, 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.

You can value the startup depending on the various factors like; the company revenue model, technology used, and the product and services.

Valuation of Startups: Know how it is done.

Minimum requirements for the valuation of the startups

It’s good to know the requirements and keep things handy while the valuation of the startups. Ask yourself questions and prepare the answer ready while you do the startup valuation. Do some math off course.

How much profit will the startup make at the end of the financial year?

You must have some idea about how much you are going to make at the end of the financial year. This is no big deal, calculating this relay on what product and services you are selling.

You have the obvious idea about how much you have spent in your startup, count on the gross profit, the expanses, and the most important the coming business income statement. You have the obvious idea about how much you have spent in your startup, count on the gross profit, the expanses, and the most important the coming business income statement.

Now, let’s do the math; calculate the net profit by subtracting your startup’s operating expenses to find out the gross profit.

Say, your company’s gross profit is 500 lakhs in the last 5 years and the PE ratio is 6.

You can do the valuation of your startup now using the above value,
500x5= 2500 Lakh.

Remember; you can value your startup on its future potential because the startups are short in earning. The method explained above is assumption-based where you will need to calculate the company’s gross profit and assume its PE value.

PE ration formula

Methods for the valuation of startups

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.

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.

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.

Discounted cash flow

Where;

r is discount rates, CF stands for given year cash flow value, is for one year,

Market Multiple Approach

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

How to Value a Startup With No Revenue?

You can calculate the worth of the already matured business with the help of its consistent source of sales and financial statements. This is a lot easier than valuing a premature startup.

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 for startups is no easy bread.

For the startups with no clue of 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 the Valuation Works

Because you’re valuing something that could or might not exist in the future, there’s a lot of space for expectations and informed guesses.

Startup valuation analyzes the shares of the company they have to give up to an investor in return for capital. Startup valuation tells the investor the startup growth prospects rather than present value.

When you do the valuation, you will set up a plan for company growth. You know how much money you should raise to grow your startup to a point so you will raise another round of startup funding.

Estimating 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 Method

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.

What are 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. Per the Venture Intelligence Startup Tracker, the following companies have got their name.

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.

Digit Insurance:

Digit Insurance based in Bangalore is the first startup that entered the unicorn club of 2021 in India. Kamesh Goyal and Prem Watsa’s Fairfax Holdings founded Digit Insurance in 2016. The company recorded 18 million from investors.

Gupshup:

Beerud Sheth, 2004 founded Gupshup which is a messaging platform for business to consumers. It has raised $100 million funding from Tiger Global Management at a valuation of $1.4 billion. Gupshup has achieved 10 unicorns within 100 days.

ShareChat:

ShareChat (content sharing social media platform) has raised $502 million from Tiger Global at a valuation of $2.1 billion. ShareChat in 2015 was founded by IIT-Kanpur alumni Farid Ahsan, Ankush Sachdeva, and Bhanu Singh.

Groww:

Lalit Keshre (Ex Flipkart employee) founded Groww in 2016. The company has raised $83 million in series D at a valuation of $1 billion.

Many other most valued companies stepped into the Unicorn Club in India like Meesho valued at $2.1 billion, Innovaccer valued at $1.3 billion, Bengaluru based B2B commerce Infra. The market valued at $1 billion, PharmEasy valued at $1.5 billion, and CRED valued at $2.2 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 charted accountants. We have served many big names for their company valuation. We know which valuation method is appropriate for a business like yours.

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