Dec 30 2019

Startup Evaluation – How to Value an Early-Stage Company?

Evaluating a startup is necessary from the viewpoint of understanding the company’s net worth, its
position, the promise it holds, and also its value in the years to come. If you are a startup owner looking
forward to knowing how to value your startup, this article talks about the three most common and
trustworthy startup evaluation methods to help you understand the real value of your business.

1. Venture Capital Method (VC Method)

This method helps perform the pre-money valuation of startups. It is done through the
following formula.

– Return on Investment (ROI) = Terminal Value (Projected selling price) ÷ Post-money Valuation
– Post-money Valuation = Terminal Value ÷ Projected ROI
For instance, you’ve got an agency with a terminal value of 10,00,000 INR, with a projected RoI of 5X,
and if these elements need INR 50,000 to obtain a positive cash flow, you can do the following.
– Post-money Valuation = Terminal Value ÷ Projected ROI = 10,00,000 INR ÷ 5X
– Post-money Valuation = 2,00,000 INR
– Pre-money Valuation = Post-money Valuation – Investment = INR 200,000 – INR 50,000
– Pre-money Valuation = INR 150,000

2. Scorecard Valuation Method

The Scorecard valuation method involves the average pre-money valuation of your startup peers in the
market. It then figures out the startup that requires valuing against the benchmark, through a scorecard.
Here’s the process that constitutes the scorecard valuation method.
– Determine the average pre-money valuation of pre-revenue companies in the same business.
– Use the Scorecard Method to compare. The scorecard involves factors with a score tagged to
them, including the strength of the management team, market opportunities, competition,
technology + products, marketing + strategic alliances+ distribution channels, the need for any
additional investments, and many other miscellaneous factors.
– Assign a factor to each of the above elements of the targeted startup.
– Lastly, multiply the total of all the factors with the average pre-money valuation of the pre-
revenue companies.

3. Risk Factor Summarization Method

The risk factor summarization method involves a comparison of 12 essential elements.
– Management
– Stage of the business
– Legislative/Political risk- Funding/capital raising the risk
– Manufacturing risk
– Reputation risk
– Sales and marketing risk
– Litigation risk
– Competition risk
– International risk
– Technology risk
– Potentially profitable exit

Each of the above elements is assessed based on the following scores.

+2 for very positive for company growth and a great exit, +1 for positive, zero for neutral, -1 negative for
the company’s growth and a great exit, and finally -2 for very negative.
At Valuation India, we are experts helping you value your startup in the most accurate manner. Get in touch
with us to calculate the actual value of your startup, and thus know the correct market value and
position of your business in your market.

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