Regardless of what vertical or industry your startup is a part of, there’s a chance you’ll an investor(s) to grow your business. Course, the easiest way to get an investor to value your business is to “show” its value in numbers.
For a startup business to know its value, it must use the valuation methods for startups to calculate their worth. These methods can help small business owners determine the actual value of their business so they can secure their funding.
Startup valuation frameworks give investors an estimated value of the business, even if it is in its early stages. With this information, it becomes easy for investors to make the right decision and pour their resources into the right businesses. Here are the major startup valuation methods that can enable you to get the value of your business:
Berkus Approach or Development Stage Valuation Approach
The Berkus Approach is based on a detailed assessment of different variables concerned with the startup’s progress. It evaluates the progress made by business owners in their bid to elevate the business off the ground.
The five key success factors that the Berkus Approach focuses on include:
- basic value,
- and strategic relationships in the industry.
The startup value is based on the quantitative measure of those key success factors.
Valuation by Stage Method
The Stage-Method Valuation involves various funding stages so that investors can calculate the risks involved at specific stages. The venture capital (VC) companies and private investors decide on a range of startup valuation methods.
The more the business continues operation, the less risk they are exposed to. It means that startups with only business plans will end up with a lower valuation than those that have passed through developmental milestones.
When it comes to the risk-factor summation approach, it focuses on risks that can affect the startup’s return on investment. Some of the risks that the method pays attention to include: legislation/political risk, manufacturing risk, technology risk, competition risk, investment and capital accumulation risk, litigation risk and reputation risk.
Under this method, the startup’s estimated initial value is calculated using any other startup valuation method. Once all risks are considered, the startup’s final value is determined by implementing the ‘risk factor summation’ to the initial estimated value.
The Cost-To-Duplicate Approach considers the hard assets, costs and expenses of the startup and calculates the amount it would cost to duplicate the business. The business’s fair value is determined, and the investor will not put in more than they should.
A key limitation to the method is that it does not consider the potential of the business. It does not consider intangible assets such as the reputation or brand value of the startup, resulting in a lowball estimate of the business.
Discounted Cash Flow (DCF)
The DCF or the Discounted Cash Flow method involves projecting the income the organization will create. A rate of return on investment (discount rate) is estimated, putting in mind the projected cash flow.
Generally, startups are usually exposed to high risks, and this attracts a higher discount rate. For the method to work accurately, market analysts need to calculate assumptions and guesses during their calculations.
Getting your business’s value is critical to small business owners looking for funding for their businesses’ growth and development. Seed investors and venture capital (VC) companies take startup valuation methods seriously since they want to invest in the right company, knowing what to expect in return.