A startup is a young company founded by entrepreneurs who are looking for innovative ways to solve issues or provide something new to customers. The process of assessing the financial worth of an organization, in this case of a startup is known as Startup evaluation.

The evaluation process includes gathering and assessing various variables, such as sales, earnings, and expenditures, as well as the threats and possibilities that a company confronts. The purpose is to evaluate a company's intrinsic worth so that entrepreneurs and investors may make educated acquisition, sale, or investment choices.

Why is it essential to estimate the worth of a startup?

A startup can only do so much if it has the funding to grow properly its core concept or idea. A startup without money is doomed to fail, thus acquiring financing for your firm, along with expanding the technical side of the business, is one of the most critical activities you may find yourself immersed in.

How to select the proper evaluation method.

There are numerous methods for valuing a business. Some are more complicated than others, and valuations for the same underlying asset may differ depending on the method used.

The best method for valuing a business is determined by a number of factors, including the purpose for the valuation. When selling a business, for example, you generally like to get a higher price. If you're buying a business, on the other hand, you'll probably want a more conservative evaluation to prevent paying extra.

Startup business valuation timeline in different stages by Slide Team will assist you in further making these core decisions in the beginning.

With that being said, Let's get to the list of 6 evaluation methods you can use to determine the worth of your startup confidently and effectively. 

1. The Berkus Method

Dave Berkus, an angel investor, developed the Berkus method. Investors, he believes, must be able to see themselves breaking the $20 million barriers in the next five years.

Although the basic idea behind this method is to assign a monetary value to risk-reduction elements, investors can greatly alter it. When dealing with a medical device startup, for example, an investor might consider substituting "FDA approvals risk" for "marketing risk," according to Berkus.

determining the worth of a startup company based on a thorough examination of five key success factors:

1. Basic value
2. Technology
3. Execution
4. Strategic relationships in its core market
5. Production and consequent sales.

2. Scorecard Valuation Method

The Scorecard Valuation Method, developed by angel investor Bill Payne, contrasts a startup with other funded startups in the same segment, phase, and territory.

The scorecard company appraisal assists angel investors in determining a mean valuation for businesses that have the potential to grow but have yet to generate revenue. 

To calculate an acceptable average, this method employs weighted percentages and market data. Several factors are taken into account, including the team, the product or technology, the competition, operations & marketing, and the need for additional funding.

The scorecard method has been proven to be thorough. This method of startup valuation examines a company's prospects from all angles.

The scorecard method is the most widely used method for calculating a pre-money value.

The following are the main criteria for ranking the scorecard method:

• Board, entrepreneur, the management team  – 25%
• Size of opportunity – 20%
• Technology/Product – 18%
• Marketing/Sales – 15%
• Need for additional financing – 10%
• Others – 10%
•  

3. Cost-to-Duplicate Approach

This method entails assessing how much it would charge to build a similar company from the ground up. The concept is that a wise investor would not pay more than it would cost to recreate something. To determine the fair market value of physical assets, this method frequently looks at them.

This type of valuation is justified by the fact that most shareholders wouldn't like to buy shares beyond what it would bring to recreate the business. This startup valuation method necessitates a thorough examination of the startup's assets in order to identify the fair market value. 

This is among the few initiatives that do not generally consider the startup's future.

The total cost of programming time that has gone into designing a software business, for example, could be used to calculate the cost of duplicating it. It could be the costs of research and development, patent protection, and prototype development for a high-tech startup. Because it is fairly objective, the cost-to-duplicate approach is frequently used as a starting point for valuing startups.

After all, it's based on historical expense records that can be verified.

The cost-to-duplicate approach has the following disadvantages:

• By running projection statements of future sales and growth, the company's future potential is overlooked.
• Not taking into account its intangible assets in addition to its physical assets. The argument here is that even at the startup stage, the company's intangibles, such as brand value, goodwill, patent rights (if any), and so on, may have a lot to offer for valuation.

4. Risk Factor Summation Method

Simply put, the risk factor summation method (RFS method) is a harsh pre-money valuation method for start-ups. The risk factor summation method bases the company's valuation on the base value of a comparable startup. This baseline value is adjusted to account for 12 common risk factors.

This method involves assigning ratings of -2 to +2 to 12 risk categories, with 0 negative ratings lowering the final valuation and positive ratings raising it. Risk Factor Summation is, in some ways, an addition to the Berkus Method.

These 12 risk factors are used to compare the startup to other similar firms.

• Risk of the Management 
• Stage of the business
• Political risk
• Supply chain or manufacturing risk
• Sales and marketing risk
• Capital raising risk
• Competition risk
• Risk of Technology 
• Risk of Litigation 
• International risk
• Risk of Reputation 
• Exit value risk

5. Market Multiple Approach

A multiple is a calculation that divides one metric by another to determine some aspect of a company's financial health. Metrics are numerical tools that are used to assess a company's performance. In most cases, the numerator's metric is greater than the denominator's.

The multiples approach is a valuation theory that assumes similar assets sell at comparable prices. It is assumed that the ratios used to compare firms, such as gross margins or cash flows, are the same across comparable businesses. In general, "multiples" refers to a group of various metrics which can be utilized to determine the value of a stock. The multiples model is a process of comparative analysis that aims to value comparable companies based on the same financial metrics.

A multiple is a ratio that is computed by dividing an asset's market or estimated value by a specific financial statement item.

Let's say the owners of a $10 million dollar phone company would like to price their company. According to research, numerous competitors have recently been purchased for 5x revenue. Entrepreneurs can then set their company's price at $50 million.

Multiples can mislead you and be cautious of it as well.

6. Discounted Cash Flow Model (DCF)

Discounted cash flow (DCF) is a valuation method that uses expected future cash flows to estimate the value of an investment. DCF analysis attempts to determine the current value of an investment based on forecasting how much cash it will generate.

The goal of a DCF analysis is to calculate how much money an investor would get from a given investment after accounting for the time value of money. Because money can be invested, the value of money presumes that a dollar today is worth more than a dollar tomorrow. As a result, a DCF analysis is suitable in any situation where a person is paying money now in the hopes of receiving more money later.

If you have a start-up, Hope these 6 methods will help you evaluate the proper value of it. We are here to help you with your startup, no matter where you are in the process.

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