How to Calculate the Valuation of a Startup?

Are you a startup owner looking to bring in investors for your venture or want to know your business’s market worth? Then it is obvious for you to ask how to calculate the valuation of a startup. You can hire startup valuation services that involve using various startup valuation methods to help you determine your business’s value. But knowing how to do it can help. So, here’s how to calculate a startup’s value.

Startup Valuation Methods

The top companies for startup valuation use various methods to calculate the value of a startup. Let’s overview four of them.

  1. Book Value Method

The book value method helps you do your startup’s asset-based calculation. While it is similar to the cost-to-duplicate approach, it is even more straightforward than it. Conventionally, a startup company’s book value is its total assets minus its liabilities. The method computes your startup’s net worth with its valuation.

  1. Cost-to-Duplicate Approach

The cost-to-duplicate approach enables you to calculate the cost it would take you to rebuild your startup elsewhere – minus the intangible assets, like your reputation, goodwill, etc. In this method, you add up the fair market value of your physical assets. You may also factor in aspects like research and development costs, patent costs, product prototype costs, etc. in this method.

  1. Risk Factor Summation Method

In risk factor summation, you begin with an initial valuation based on the other startup valuation methods. Further, increase or decrease the value in the multiples of $250,000 depending on risks affecting your business.

Here, low-risk elements get a double-plus grade and high-risk ones get a double-minus one. Some common risk categories include manufacturing risk, management, competition, reputation, technology, sales, marketing, etc.

  1. Venture Capital Method

The venture capital method is a go-to for venture capital firms. It helps you determine the pre-revenue valuation. Additionally, the method signifies the approach or mindset of investors, who look to exit the business after certain years. Top companies for startup valuation use two formulas to work the evaluation out.

  • Anticipated Return on Investment = Terminal Value/Post-Money Valuation
  • Post-Money Valuation = Terminal Value/Anticipated RoI

How to Calculate the Valuation of a Startup in Shark Tank?

Shark Tank is a US-based business reality television show where financiers (sharks) listen to proposals from entrepreneurs looking for funding. These financiers often expect a return on their investment. The benefit of this show is that while receiving investment for their business, entrepreneurs directly connect with stalwarts and gain access to their expertise and resources. Now, how is a business valued on Shark Tank?

If a business owner offers 25 percent of their business for INR 10,00,000 of investment, they assess their business value as INR 40,00,000. However, the Sharks would demand specific numbers and challenge their claims. The Sharks use various methods to value a particular business. They include earning multiple, revenue multiple, intangibles of valuation, and future market valuation.

How to Calculate the Valuation of a Startup Based on Funding?

Some of the top companies for startup evaluation use the 5X Your Raise Method. It is based on the money your startup raises. Startups and venture capitalists commonly use this method in conversations. This method relies on the idea that a startup’s value should be five times the money you’ve raised.

We hope this blog provided enough insights on how to calculate the valuation of a startup. The process and the methods used involve various technicalities. Accordingly, you should hire startup valuation services to ensure accuracy.

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