How to Calculate a Startup’s Valuation

By
Sami
November 4, 2021

Startups are fun, fast-paced environments where brilliant minds come together to offer new, exciting products, and services. While the business may start small and bootstrap their operations, there will come a time when a startup valuation is needed to determine:

  • Entire value of the business
  • Customer value
  • Service or product value

Whether you’re trying to sell your company or want to have a general idea of its value, there are many valuation methods available.

Types of Startup Valuation Methods

Initially, it’s difficult to evaluate a startup’s value because it doesn’t have a customer base, profits, or a history of growth. If you’re trying to value your startup in these early phases, it can be extremely difficult.

But once your company starts to pick up steam, you’ll find two main forms of valuation:

  1. Pre-Money — The pre-money value is how much the startup is worth before securing investment capital or venture funding. This value is one of the “purest” values because it’s based on the value of shares and investments.
  2. Post-Money — The post-money value, as you’ve likely guessed, is the value of the startup after seed money has been secured.

Determining the value of the startup is important when trying to secure financing or when trying to exit the startup.

A few different methods of startup valuation exist:

Comparable Pricing

If your startup is similar to another startup, it’s possible to use their valuation to determine your startup’s value. When using comparable pricing, it’s important to consider revenue and consumers or customers.

Let’s assume the following:

  • A SaaS company with 10,000 recurring monthly users that subscribe to the platform was valued at $20,000,000.
  • Your startup has 5,000 recurring monthly users and has been achieving high month-over-month growth. Comparing the users alone would allow you to assume that the value of your startup is $10,000,000.

Of course, this can be difficult until a good history is in place. If your growth has stalled or you offer a much cheaper alternative to your competitors, your business value may be much less.

Comparable pricing works well when you can compare most of your metrics, including growth, with your competitors. If your business is on the downswing, it can be even more difficult to determine the value.

Cost to Duplicate

The “cost to duplicate” method is a neat way to value a startup. When using this method, you’re going to determine how much it would cost to start the business from scratch. These costs will include:

  • Research and development
  • Assets
  • Expenditures

You’ll need to use your expenditures and accounts to better understand where your business’s costs range so that duplication can occur. The main issue with the cost to duplicate method is that you’ll not consider future sales and potential for growth.

Let’s assume that your business is growing by 20% every 4 months.

Since you have impressive growth, your business’s value will likely be much higher than the cost to duplicate.

Scorecard Method

If you’re going to meet with angel investors, it’s not uncommon for them to use the scorecard method to value your business. The method allows the investor to sit down and compare your startup to other “average” startups in the same industry.

The method compares your startup to others in the same industry that are in your:

  • Area
  • Niche

Once the “average” is found, the investor will score your startup using a variety of different metrics. When your startup is outperforming in certain metrics, the value of the startup will increase.

This is a general way to determine the value of a business and works very well.

Discounted Value Method

The “discounted value” method is a way to determine how much cash flow the startup is likely to generate over the long-term. The valuation will look at a lot of different aspects of your business, including revenue, customers, and other metrics.

The value will then be increased or decreased when considering:

  • Rate of investment return
  • Forecasting revenue and profits

Of course, there are a lot of risks with a startup, so the discounted value method will then reduce the startup valuation by taking some of the high-risk factors into consideration.

When startups want to secure funding or sell their operation, it’s essential to have a full valuation done to better understand how much the business is really worth.