Startup company valuation: types, importance, and more

The Berkus Method

The Berkus Approach, developed by American venture capitalist and angel investor Dave Berkus, focuses on evaluating a startup based on a thorough examination of five critical success factors: (1) Basic value, (2) Technology, (3) Execution, (4) Strategic relationships in its main market, and (5) Production and subsequent sales are the five factors to consider.

A thorough analysis is carried out to determine how much value the five main success criteria provide to the enterprise's total worth in quantitative terms. The startup company valuation is based on these figures. The Berkus Approach is also known as the "Stage Development Method" or the "Development Stage Valuation Approach."

Risk Factor Summation Approach

The Risk Factor Summation Approach evaluates a startup by quantifying all risks associated with the company that could affect the return on investment. Using any of the other approaches covered in this article, an estimated initial value for the startup is derived using the risk factor summation method. The influence of various sorts of business risks, whether positive or negative, is factored into this starting value, and an estimate is removed or added to the beginning startup company valuation based on the risk's effect.

The Cost-to-Duplicate Approach

The Cost-to-Duplicate Approach entails factoring in all costs and expenses related to the startup and product development, including the purchase of physical assets. All of these costs are considered in determining the startup's fair market value based on all of the costs.

Market Multiple Approach

One of the most often used startup valuation methods is the Market Multiple Approach. The market multiple approach works in the same way as other multiples do. Recent market acquisitions of a comparable nature to the company in question are considered, and a base multiple is calculated using the value of the recent funding rounds. The startup is then appraised using the market multiple as a starting point.

Discounted Cash Flow Approach

The Discounted Cash Flow (DCF) Method focuses on forecasting future cash flow movements for a startup. The "discount rate," or rate of return on investment, is then calculated and used to evaluate the value of the projected cash flow. Because startups are still in their early stages and investing in them carries a high risk, a large discount rate is usually imposed.

What are the types of startup valuation methods used for venture capital?

Because so much of startup company valuation is based on estimations, there is no single, universally acknowledged analytical process for investors. Instead, VCs and Angels will use a variety of venture capital valuation tools to determine a startup's worth.

The usage of such valuation methods is determined by the stage of a company's development as well as the data points accessible in the market and/or industry in which the startup works (earnings/revenue/acquisition multiples, for example). Now, we'll look at a couple of the most typical early-stage and pre-revenue angel and venture capital valuation approaches:

Scorecard Valuation Methodology

To arrive at a pre-money valuation for the target, this startup valuation method compares the target firm to typical Angel-financed startup ventures and modifies the average valuation of previously funded companies in the industry. Only companies at the same stage of development can be compared this way.

The first step is to figure out what the typical pre-money valuation of pre-revenue firms in the target company's industry is. The economy and the competitive environment for startup businesses within an industry influence the pre-money startup company valuation.

The next step is to compare the target firm to previous acquisitions you've seen in the industry, taking into account the following:

• The management team's strength is based on the founders' expertise and skillset, their adaptability, and the management team's completeness

• The market size for the company's product or service, the timescale for increasing (or generating) revenues, and the degree of competition are all factors to consider

• Product or service: product/market definition and fit, acceptance path, and entry hurdles

• The sales channel, the stage of the business, the size of the investment round, the necessity for funding, and the quality of the business plan and presentation are important factors to consider

There are several multiple-choice questions regarding your business for each comparison aspect. The answers earn you a score ranging from -3 (worst) to +3 (best) (best). To give each section a weighting, you multiply this score by the comparison factor range (see below), then add up the entire factor and multiply it by the average pre-money valuation for your industry to get your estimated startup company valuation.

Methodology for evaluating venture capital startup valuation

Professor Bill Sahlman of Harvard Business School first proposed the venture capital startup valuation method in 1987. It calculates pre-money value by first calculating post-money value using industry metrics.

What Is The Venture Capital Valuation Methodology And How Does It Work?

The following equations form the basis of the venture capital startup valuation methodology:

• Return on investment (ROI) = terminal value / post-money valuation

• Terminal value / expected ROI = post-money valuation

What is portfolio valuation and why is it important for a startup?

A portfolio valuation establishes the value of each asset owned by the investment fund or business, resulting in a total asset value for all liquid and illiquid investment holdings.

Portfolio valuation is becoming a more common aspect of valuation practice, and private equity funds, hedge funds, and other institutional money managers are increasingly turning to independent, third-party portfolio valuation services. The increased use of outside appraisals can be attributed to several factors.

Periodic portfolio valuation is used to measure and report illiquid investment performance, which is often required for financial reporting and tax compliance and has an impact on the compensation of the investment manager.