How do I value my startup?
The stage of your company will have the greatest impact on both the valuation of your company and the valuation methodologies that can be employed. Beyond that, the supply and demand for investment in your industry and sector plays a big role. It is definitely not an exact science and requires a customised approach.
We provide a guide to the most commonly used and accepted valuation methods for technopreneurs, arranged according to applicability to the company stage. Applying more than one method and arriving at a similar valuation range can add depth and credibility to the numbers.
Pre-Revenue Startups
These are the hardest to value, as most traditional valuation methods rely on “going concern” measures such as revenue, EBITDA or cash flow.
However the Berkus Method provides a solid “rule of thumb” approach where an investor believes the company can reach over $20 million in revenues by the fifth year of business. The method assesses the value of critical elements of your start-up without having to analyse the projected financials, coming up with a maximum valuation of $2,5 million for a company that is already delivering product (but is pre-revenue).
| If Exists: | Add to Company Value up to: |
| Sound Idea (basic value) | $1/2 million |
| Prototype (reducing technology risk) | $1/2 million |
| Quality Management Team (reducing execution risk) | $1/2 million |
| Strategic relationships (reducing market risk) | $1/2 million |
| Product Rollout or Sales (reducing production risk) | $1/2 million |
The Cost To Replicate method is also useful for a company that is pre-revenue, or whose revenues are still low, but has built substantial IP. This approach asks: “What would it cost for an investor or buyer to replicate what you have got? “
If you have got what a buyer wants; the question to ask and answer is: what time, talent and spend will they need to reproduce what you have? If it is going to take them six months and $10-million, you can arrive at a defendable valuation. If you have unique IP, you can factor in a premium.
Post-Revenue Startups
We can use more conventional valuation methods for startups that have been operating for at least a couple of years and have built up meaningful revenue. By far the most common method that we see is the Revenue Multiplier method, with the DCF approach more credible when there is a solid revenue track record and trend over at least a few years.
Revenue Multiple valuations look at the market value of tech startups relative to their revenue. This could be the TTM (Trailing Twelve Month) revenue, the NTM (Next Twelve Month) revenue or even the most recently completed financial year (with presumably audited financials). The more future-orientated the period, the lower the multiple – one just needs to use a consistent approach to revenue with the “comparables”.
Industry averages in similar markets and sectors are taken into consideration when deciding the value of the multiplier. The process includes gathering market data of comparable startups raising funds or exiting (as the case may be), including the recency and size of deals. The multiple is also based on the supply and demand for investment in that market/sector – for instance, right now sectors like AI and Cybersecurity are hot! Sectors that are more commoditised and characterised by lower margins have lower valuations.
The Revenue Multiple valuation can be compared to the DCF to add credibility to the final valuation.
Discounted Cashflow (DCF) is the most common valuation methodology, which most types of investors accept is the Discounted Cashflow (DCF) approach. This analysis takes into account a projected cashflow over a defined period; three to 10 years is usually acceptable depending on stage.
A discount rate is then applied based on the perceived business risk and cost of capital. If your business has a defendable turnover and existing clients, the DCF model as a stand-alone might satisfy potential investors.
Given that the revenue projections are defendable based on historical revenues and growth trends, then the main debate will be around the discount rate based on perceived risk – factors such as concentration of customers, competitor activity and robustness of demand in the sector will be considered.
The best thing that you can do to arm yourself with a sense of what values are in the market, is to discuss it with a transaction advisor that operates in your sector, who should have a feel based on actual transactions that they have done (given that this information is generally not publicly available), or will at least have done their research in your space. Alternatively, you could speak with other startups of various stages in your sector, to get a feel for the valuations in the market, based on your company stage.
