METHODS TO VALUE A STARTUP 5
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METHODS TO
VALUE A STARTUP
5
The formulas in the following slides are automatically computed by the Equidam algorithm. The concepts explained here are the
underlying principles of the 5 most frequently used valuation methods to be aware of when negotiating with investors.
DISCLAIMER
VALUATION
QUALITATIVE METHODSSCORECARD METHODCHECKLIST METHOD
FINANCIAL METHODSFUTURE VALUETERMINAL VALUEDCF WITH MULTIPLESDCF WITH LONG-TERM GROWTHVC METHOD
TABLE OF CONTENTS
METHODS TO
VALUE A STARTUP5
Business valuation is defined as the process of determining the
economic value of a business or company by analyzing a set of economic factors using various formulas and models.
VALUATION OF A BUSINESS IS ITS PRICE ON THE MARKET
3| The DCF method with Multiples1| The Scorecard method
2| The Checklist method
QUALITATIVE METHODS FINANCIAL METHODS
4| The DCF method with Long-Term Growth5| The VC method
A GOOD VALUATION TAKES INTO ACCOUNT MULTIPLE METHODS
The most formalized methods that business angels use for early-stage companies are
THE SCORECARD METHOD
THE CHECKLIST METHOD
QUALITATIVE METHODS WEIGH MORE IN THE VALUATION OF STARTUPS
Angel investor Bill Payne originally came up with the scorecard method, and described it in his book “The Definitive Guide to Raising Money From Angels” (2006).
The factors on the right are given a score based on a comparison
with similar businesses
Quality of the Idea
Quality of the Management Team
Product Roll-Out and Protection
Strategic Relationships
Operating Stage
THE SCORECARD METHOD COMPARES STARTUPS TO ALREADY FUNDED COMPANIES
COMPARISONS RANGE TARGET COMPANY FACTOR
Strength of Entrepreneur & Team 30% max 125% 0.3750
Size of the Opportunity 25% max 80% 0.2000
Product/Technology 15% max 100% 0.1500
Competitive Environment 10% max 60% 0.0600
Marketing/Sales/Partnerships 10% max 90% 0.0900
Need for Additional Investment 10% max 60% 0.0600
Total Sum of Factors 0.935
The founding team all participated in startups before - give a score of 125%
EXAMPLE
Pre-money valuation
0.935 = $748,000= $800,000X
Sum of factors
BUSINESS VALUE
*This method was created by Dave Berkus
Quality of the Management Team
Sound Idea
Product and technology
Strategic Relationships
Product Rollout or Sales
A scale is applied rating each of the components on the right at up to $500, 000.
THE CHECKLIST METHOD HAS FIXED VALUE AMOUNTS ATTACHED TO EACH ELEMENT
CHARACTERISTIC FACTOR SCORE MAX VAL. VALUE
Quality of Management Team 24% 100% $0.5m 24%*100%*0.5m= 120,000
Sound Idea 20% 80% $0.5m 20%*80%*0.5m= 80,000
Product and technology 12% 100% $0.5m 12%*100%*0.5m= 60,000
Strategic Relationships 20% 90% $0.5m 20%*90%*0.5m= 90,000
Product Rollout or Sales 24% 50% $0.5m 24%*50%*0.5m= 60,000
Final valuation $410,000
The sum of the values of each element then becomes the valuation of the business
EXAMPLE
FINANCIAL METHODS ARE APPROPRIATE FOR COMPANIES WITH TRACK RECORD
These methods rely on solid financial projections based on the historical performance of the business.
Before moving on to the methods, we need to explain key financial concepts
TIME VALUE OF MONEY TERMINAL VALUE
PRESENT VALUE = /
Discount rate is a coefficient used to calculate today’s value of future cash flows and account for the uncertainty of an investor receiving returns in the future. The higher the risk, the higher the discount rate.
*where n is the number of years
TIME VALUE OF MONEY
$100 today is worth more than $100 tomorrow
(1+discount rate) n
Cash flow
TERMINAL VALUE = XEBITDAlast year in projections
EBITDA multiple
Multiple is the result of the valuation of a comparable company divided by its EBITDA
TERMINAL VALUE CAPTURES THE COMPANY VALUE AT THE END OF A PERIOD
*We assume that the discount rate is 10%
Sum of all years Terminal value
$1,396, 000
BUSINESS VALUE =
$180,000 + $166,000 + $150,000
+ $900,000
=
Terminal value = $200,000 x 0.75 x 6 = $900,000* Assuming a multiple of 6
DISCOUNTED CASH FLOW METHOD WITH MULTIPLES IS BASED ON EBITDA MULTIPLE
YEAR 1 YEAR 2 YEAR 3
Free cash flow $200,000 $200,000 $200,000
Discount rate 10% .90 .83 .75
Net present value $180,000 $166,000 $150,000
DCF METHOD WITH LTG ASSUMES CASH FLOWS WILL GROW AT A CONSISTENT RATE
YEAR 1 YEAR 2 YEAR 3
Free cash flow $200,000 $200,000 $200,000
Discount rate 10% .90 .83 .75
Net present value $180,000 $166,000 $150,000
TERMINAL VALUE = (1+5%) / 10%-5%
Final Projected Year Cash flow 1+Growth
rate
= 420,000200,000 x
*Assuming the projected growth rate is 5%
Discount rate - Growth rate
Sum of all yearsDiscounted
Terminal value
$811, 000BUSINESS VALUE =
$180,000 + $166,000 + $150,000
+ =$420,000 * 0,75
POST-MONEY VALUATION
/$200,000 * 6 10=
*Assuming VC is looking for 10X return
Terminal Value Anticipated ROI
= $120,000
VENTURE CAPITAL METHOD IS BASED ON THE ESTIMATION OF THE EXIT VALUE
To reach the pre-money valuation, simply subtract the investment amount from the post-money valuation
Scorecard Method $748,000Checklist Method $410,000
DCF with Multiples $1,396,000DCF With Long-Term Growth $811,000
VC Method $120,000
When negotiating with an investor, always provide a range of valuation
that you feel comfortable with and use it as a starting point
FINAL VALUATION IS A COMBINATION OF ALL METHODS
The weight given to each method to determine the final valuation depends on the stage of development of the startup
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