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How can you evaluate a startup's value?

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Evaluating a startup's value is not an exact science, but a crucial skill for entrepreneurs who want to raise funds, sell their business, or negotiate partnerships. There are different methods and factors to consider, depending on the stage, industry, and goals of the startup. In this article, you will learn some of the most common and useful ways to estimate how much your startup is worth.

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Vick Tipnes

Healthcare Entrepreneur I Founder of The Rise Conference | Amazon Best Selling Author “Did You Sell Your Soul?”
沈玟企Michael

成功的基金管理战略 | 培养基金管理领域的新一代领导者
Sergio Goldman

Finan?as Corporativas | Valuation | Cria??o de Valor | Funding estratégico | Equities | IPO | Rela??o com…

1 Market-based approach

One way to evaluate a startup's value is to compare it with similar companies in the same market, either publicly traded or recently acquired. This method involves finding relevant metrics, such as revenue, users, or growth rate, and applying a multiple or a ratio to them. For example, if the average revenue multiple for SaaS startups in your sector is 10x, and your startup has $1 million in annual revenue, you could estimate its value at $10 million. However, this approach has some limitations, such as the availability and accuracy of comparable data, and the differences between startups in terms of product, team, and competitive advantage.

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Vick Tipnes

Healthcare Entrepreneur I Founder of The Rise Conference | Amazon Best Selling Author “Did You Sell Your Soul?”
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Remember that valuation is not a one-time task; it should evolve as your startup grows, incorporating changes in the market landscape, user base, and revenue streams to ensure you make informed decisions.

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2 Cost-based approach

Another way to evaluate a startup's value is to calculate how much it would cost to recreate it from scratch. This method involves adding up all the expenses and investments that the startup has incurred, such as development, marketing, legal, and operational costs. For example, if you have spent $500,000 to build and launch your app, you could estimate its value at $500,000 or more. However, this approach does not account for the potential revenue, growth, or impact of the startup, and may undervalue its intangible assets, such as brand, network, or intellectual property.

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3 Income-based approach

A third way to evaluate a startup's value is to project how much income it will generate in the future, and discount it to the present value. This method involves creating a financial model that estimates the revenue, expenses, and cash flow of the startup for a certain period, usually 3 to 5 years, and applying a discount rate that reflects the risk and uncertainty of the startup. For example, if you expect your startup to earn $2 million in net income in 5 years, and you use a 20% discount rate, you could estimate its value at $800,000 today. However, this approach requires making many assumptions and forecasts, which may not be realistic or accurate, and may vary depending on the scenario and the investor.

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Vick Tipnes

Healthcare Entrepreneur I Founder of The Rise Conference | Amazon Best Selling Author “Did You Sell Your Soul?”
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When using the income-based valuation method, it's essential to conduct sensitivity analyses to assess how changes in key assumptions, such as growth rates and discount rates, can impact your startup's valuation.

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4 Scorecard approach

A fourth way to evaluate a startup's value is to use a scorecard that assigns weights and scores to different aspects of the startup, such as market size, product quality, team experience, competitive advantage, and traction. This method involves finding the average pre-money valuation of startups in your industry and stage, and adjusting it up or down based on the scorecard results. For example, if the average pre-money valuation of seed-stage fintech startups in your region is $5 million, and your startup scores 80% on the scorecard, you could estimate its value at $4 million. However, this approach is subjective and may not reflect the true potential or uniqueness of the startup.

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5 Customer-based approach

A fifth way to evaluate a startup's value is to use a customer-based metric, such as customer lifetime value (CLV) or customer acquisition cost (CAC). This method involves estimating how much revenue and profit each customer will bring to the startup over time, and how much it costs to acquire them. For example, if your average CLV is $500 and your average CAC is $100, you could estimate your value per customer at $400. Then, you could multiply this by the number of customers or the expected growth rate to get the total value of the startup. However, this approach may not capture the full value of the startup, especially if it has other sources of income, such as advertising or data.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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沈玟企Michael

成功的基金管理战略 | 培养基金管理领域的新一代领导者
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While the above are essentials for consideration to evaluate a startup, these are some of the "soft" sides often missed out for consideration when evaluating a startup: 1) Did the founder place in own money-having own money placed means the founder is confident of the product and have faith to make it success. 2) Are the skills-sets needed to sell the product a time-tested skills by the founder or a new skill - some investors consider this a key element when they evaluate a business, having no related skills also means a good business plan might fail eventually. 3) What is the exit strategy of the founder-knowing when the end goal is often miss out in a business plan. Knowing the exit plan and when to exit is crucial. Food for thoughts!

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Sergio Goldman

Finan?as Corporativas | Valuation | Cria??o de Valor | Funding estratégico | Equities | IPO | Rela??o com Investidores e demais Stakeholders
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If we are talking about the determination of the startup value, I believe the most appropriate ,method is discounted cash flow (DCF). That said, I agree that in most cases, estimating how a startup will perform in the future is a major challenge. Therefore, I would use all the different methods mentioned above. I personally don′t like revenues of GMV multiple. Ok everybody uses them but I see no conceptual justification to use them.

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Vick Tipnes

Healthcare Entrepreneur I Founder of The Rise Conference | Amazon Best Selling Author “Did You Sell Your Soul?”
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Get an expert. Collaborating with financial experts or advisors can help you refine your financial models and ensure a more comprehensive and reliable valuation, especially when seeking investment or negotiating deals.

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How can you evaluate a startup's value?

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2

3

4

5

6

1 Market-based approach

2 Cost-based approach

3 Income-based approach

4 Scorecard approach

5 Customer-based approach

6 Here’s what else to consider

Entrepreneurship

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How can you evaluate a startup's value?

1

2

3

4

5

6

1 Market-based approach

2 Cost-based approach

3 Income-based approach

4 Scorecard approach

5 Customer-based approach

6 Here’s what else to consider

Entrepreneurship

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