How do you verify your valuation projections?

Each valuation method has blind spots. For instance, DCF is notoriously tricky for startups with fluctuating or uncertain cash flows. Market multiples can be skewed if there are few comparable companies or if those companies are not truly similar. The VC method is often overly optimistic as it works on the assumption of a successful exit, which is not guaranteed. In the real world, some investors add another layer of complexity by looking at the startup's intangibles like team quality, market timing, or geopolitical considerations. These aren't easily quantified but can influence valuation significantly.

To ensure accurate startup valuation, employing a diverse set of methods like DCF, market multiples, and the VC method is essential. These approaches offer a comprehensive perspective, allowing for cross-validation of assumptions, mitigating outliers, and providing a negotiation range when discussing valuation with potential investors.

?? Valuing a startup is like piecing together a complex puzzle. ??The trio of DCF, market multiples, and VC methods each bring their unique insights into the startup's potential. ?? DCF delves into the nitty-gritty of cash flows, market multiples provide a snapshot of industry comparisons ??, and VC method gauges investor expectations ??. By using all these methods in tandem, one can paint a comprehensive picture of the startup's worth, minimizing the risk of overlooking critical factors ???. It's not just about crunching numbers; it's about crafting a compelling story for potential investors.

Obviously things change with stage! I'm focused on early stage businesses raising Venture Capital so will share that perspective. Honestly I do not think it's quite as complicated as is often assumed! Something VCs look at is how large the potential exit is. In the seed round a good rule of thumb (as a jumping off point) is can I 1000x this number in 5-7 years? For example if I raised at a $10m valuation, can I reach $10bn? How? How does the amount I am raising in this round get me to the next one? If you can make people believe that journey, with you at the helm, you can defend your early valuation. Important to note, having traction, great team etc. Are vital for getting investors to believe you can achieve that 1000x.

Valuations - 'How much investor ready invest and how much you ready let go'. Cause it's the demand of Money against the supply of businesses in a domain that drives valuation. Valuation is not market multiples or Discounted Dash Flow. DCF can be illusive, as company with most revenue may not be profitable based on gross margins and gross margins necessarily need not remain same in Future. Market multiples - the startup's MOAT itself gets discounted. There is a possibility of adjacency being captured in future. Valuation is for the future scale and capabilities. Valuations needs to be mean/median of all the possible methods followed by reaching out multiple investors understand what VC market is ready to pay and adjust valuation.

In the era of 'fake news' and biased reports, the source of your data can be as critical as the data itself. For instance, using annual reports and audited financials is always safer than relying on hearsay or non-credible blogs. Some investors also resort to primary research, conducting interviews with customers or ex-employees to validate the data they have. Another point worth mentioning is that even the most reliable data can become obsolete quickly in a fast-moving sector like fintech or health tech. Always ensure the data is up-to-date.

Reliable data is crucial for startup valuation. It ensures accuracy, credibility, risk assessment, transparency, and investor trust. Accurate data supports financial projections, aids negotiations, and helps with legal compliance, strategic planning, and potential exits like acquisitions or IPOs. It's the foundation of sound valuation.

Some best practices in the AEC industry to verify valuation projections and data: Perform due diligence on the project, including reviewing project contracts, financial statements, project timelines, and potential risks. Verify that the assumptions in the valuation model align with the project's status. Conduct scenario analysis by varying key assumptions in the valuation model to assess the projection sensitivity to different factors for robustness. Review the financial model, including assumptions, inputs, and calculations. Ensure that it follows industry best practices and is error free. Compare the valuation data and projections with similar AEC projects in the area to provide insights into the reasonableness of the projections.

Always rely on some ground realities relating to the industry. Simple things like over-drawn salaries by founders, absence of a sound financial model, etc. may draw a clear red flag about the company or startup. Not everything can be relied on numbers though. But quite a few qualitative factors contribute to the overall strategy. Venture capital is much reliant on the external factors; then mere numbers given by the founders.

?? Valuing a startup relies on the bedrock of reliable data. We should begin by gathering financial statements, user metrics, and market research. For instance, if valuing a tech startup, analyze CAC, churn rate, and revenue growth. Next, scrutinize industry benchmarks to gauge competitiveness. For example, compare the startup's market share and profitability to industry leaders. Also, seek endorsements from reputable sources, like endorsements from industry experts or positive press coverage To validate data, cross-check it with various sources and run sensitivity analyses. For instance, if user data shows exponential growth, consider how market conditions might affect this trend

Consider the Source: The feedback from someone who has successfully built or invested in startups in your industry can be far more valuable than from someone with less relevant experience. Challenge the Feedback: Always question and scrutinize the feedback you get. Does it align with your compiled data and your understanding of the market? Avoid Feedback Fatigue: With many people providing input, it’s easy to suffer from feedback fatigue. Knowing when to stop collecting opinions and start acting on them is essential. Bias and Conflict of Interest: Advisors or potential investors might have their interests and biases. They may lowball your valuation intentionally or give advice that serves their position better than yours.

??? Seeking feedback is akin to fine-tuning a masterpiece. Engaging with mentors, advisors, peers, and investors offers a treasure trove of insights. They serve as a sounding board, helping to polish your pitch and refine your valuation. Through candid discussions, they unveil your startup's true potential, challenging assumptions and revealing blind spots. Each perspective is a stepping stone toward success. By embracing feedback, you not only improve projections but forge valuable connections, nurturing your startup's growth. It's a path paved with experience, a journey towards securing funding and achieving your dreams.

Ask yourself: what stage of the business growth cycle is the company currently in? Knowing that will help you figure out which valuation method you should use: Founding stage: TAM analysis Hyper-Growth stage: Earnings Power analysis Break-Even Stage: Multiple analysis Operating Leverage stage: Reverse DCF analysis Capital Return Stage: DCF analysis Decline Stage: Nothing! Don't use the wrong valuation method at the wrong time or you will come to the wrong conclusion.