How to value a startup?

For some reasons you would like to know how much your startup is worth, maybe you are searching for investors and you want to know what offers you should expect, or maybe you are searching for a co-founder and want to give him some equity or you are planning on selling you startup. Basically if you are asking yourself: “how do I value my startup?”, then you are in the right place, let’s start.

There isn’t a single method

This is why valuing a startup is much harder than valuing a normal business. Either way, let’s explore the various common methods.

Market Multiple Approach

The problem resides in finding companies similar to yours, every company is different and there probably isn’t recent data about an acquisition of a company in you field. In addition to this, it is hard to value very early startups or pre-revenue startups, since you don’t have a value to multiply.

The pros of this method is that it gets its data from past acquisitions, so you know that someone is willing to pay that amount for a similar startup.

Cost-to-Duplicate

To calculate all the assets of, for example, a software company you would sum all the proprietary software, the eventual patents and the cost of the developers that would need to work on the project, plus any other cost (such as UI and UX design).

Unfortunately this method doesn’t take into consideration all the “intangible assets” such as brand, potential for growth and competitiveness of the industry.

As I think you would agree, finding customers and getting known, is actually the hardest part of starting a business and this method completely ignores that part.

Berkus Approach

  • Valuable business model (base value)
  • Available prototype (reducing technology risks)
  • Abilities of the founding or management team (reducing implementation risks)
  • Strategic relationships (reducing market risks)
  • Existing costumers or sales (reducing production risks)

Each of these metric is valued and given a monetary value of maximum $ 500k. This is because Berkus sets a soft limit of 2.5M valuation pre-revenue.

As you can imagine this method is very dependant on the person using it and relies heavily on the experience of the person doing the valuation.

Discounted cash flow

The DCF method involves forecasting the cash flow that the startup will produce in the future and then “discounting” that cash flow to calculate how much it is worth. An higher discount rate is typically used for startups since they are an high risk investment.

The only problem with the DCF method is that it heavily depends on the forecast and on the assumptions that are made when creating the financial model, leaving the method very dependant on the analyst who makes the forecast (if only there was a better method… SPOILER, there is).

Wrapping-up

A new method

With our platform you can create a financial model for your startup in 5 easy steps that don’t require more than 15 minutes, meanwhile our AI will check if your assumptions are too optimistic or too pessimistic based on thousand of free startups data.

At the end you have a solid financial model that has accurate assumptions, do you see where we are going now? Now that you have a realistic financial model we automatically calculate your startup value with the discounted cash flow method based on the cash flow that you startup will generate. All in a single platform.

Example:

Discount rate = 25%
Monthly Cash Flow = 74k $
Discounted Cash Flow = 5,250,000 $

This is just a demo (xEBITDA = 10, 2 years projection). We made many assumptions and over-simplified a lot.
If you want a precise valuation just join Sturppy and get a valuation for free in less than 20 minutes.

Sturppy is so much more and can also help you get investors since you can just share with them the link to your financial model, if you want to learn more, check out our features.

Conclusion

Good luck on your journey.

Founder of Sturppy.com