The Black Art Of Startup Valuation
Matthew Cushen writes for StartUps.co.uk on the black art of Startup Valuations. He explains pre-money and post-money valuations and discusses how the valuation of startups differs from the methods used to value mature companies.
Given that with mature companies the valuation is often based on the earnings and is calculated as a multiple of earnings, that poses a problem when it comes to the valuation of startups as, by their nature, they tend to lack a steady history of profits.
It therefore falls on the investor to judge the “potential” or likely turnover and profit. This will often be based on the size of the market, the business model, any specific advantages the business has over competitors etc. To compensate for the fact that there is no established history of revenue, the investor would seek to apply a discount for the extra risk being shouldered.
Valuing a new business seems like a black art, with its own language and with few rules.
Let’s try to clear some of the fog…
When setting the pre-money valuation, there are two simple principles that are worth keeping in mind:
Valuing a start-up is only vaguely related to valuing an established business
The only valuations that count are when two parties are prepared to buy and sell – the full article.