Startup type businesses get valued at various stages in their evolution. The key point here is startups need to undergo a series of valuation exercises at regular intervals; and the exercise is typically performed with limited financial data being available for the appraiser to use (with limited data being the norm). There are many approaches to valuing a startup – using a forecasted discounted cash flow (DCF) model and/or “transaction comparables” being the ones typically used most often by business appraisers.
The DCF valuation method essentially involves estimating cash flows for a number of years into the future, then deducing the “perpetual” cash flow by taking the last year of the forecasted cash flow and assigning a steady growth rate. These cash flows are then discounted back to the present value by an appropriate discount rate.
DCF is both scientific and an art form, mainly due to the sheer number of variables that can alter the cash flows of the future. Even the cost of capital (discount rate) is hard to calculate, because it involves an estimation of a startups’ risk – something we know can also change within very short intervals.
The other commonly used technique is called market comparables – with the premise that a startups’ valuation is being estimated by finding companies with very similar metrics – team size, technology, addressable market, growth rates, etc. While easy to calculate, market comparables tend to oversimplify many unique dynamics prevalent with a startup.
In conclusion, a good tactic to valuing a startup involves a mix of scientific and an art-form using the various valuation approaches and methods.
How can American Business Appraisers Help?
The valuation of early stage companies uses scientific analysis, and human judgement. Our staff has experience in recognizes and quantifies a business’ early stage value. With our initial consultation, there is no cost or obligation to you. We promise you two things; first, to invest a reasonable amount of time to gain an understanding of your specific requirements, and second, our communication will be kept confidential.