How Do You Value A Startup?
Raising investment money from Angels or VC’s is a lot different to finding a buyer for an existing business. Existing businesses are often valued on the profits they are generating. But how do you value a business that has no profit yet, and may not even be generating any sales?
Gary C Bizzo looks at this in his article for equities.com.
One method of valuation is comps – comparing the startup to other, similar startups. Hi-tech startups may use the Berkus method. There’s also the Bill Payne for pre-money valuations.
The Venture Capital method developed by a Harvard Business School professor is one that looks at the Terminal value of the opportunity in 4-7 years. It’s based on a post-money valuation plus expected ROI. VC’s like our shark buddies want between 10-30 times return on their money because they are shouldering all the risk.
The VC Method or, as it is also called, the First Chicago Method “is a business valuation approach used by venture capital and private equity investors that combines elements of both a multiples-based valuation and a discounted cash flow valuation approach.” Wikipedia
Bottom line: There is no secret formula, no one-size fits all. Valuation is fluid, it’s subjective and the value at which a deal is agreed is going to be influenced by the relative sophistication of investor and entrepreneur in addition to environmental factors such as competitors looking for funding, the state of the economy, the cost of capital, timing, the level of investor demand for a piece of the action in the entrepreneur’s project and several other factors.
