Startup Valuations: Definition, Valuation Methods, Pre-Money Valuation and Post-Money Valuation
In this video of Startup 101 series, we explain what is startup valuation, how you can value your startup, different valuations methods you can use, what is the difference between pre-money and post-money valuations, and what are the disadvantages of valuing your startup too high or too low.
00:00 Introduction
00:21 What is Startup Valuation?
00:57 Startup Valuation Methods
01:23 Comparison Method
03:09 Scorecard Method
04:25 DCF Method
05:17 Cost-to-Duplicate Method
05:55 MAU/DAU Method
07:27 Pre-Money Valuation and Post-Money Valuation
08:22 Disadvantages Of Valuing Your Startup Too High Or Too Low
What is startup valuation?
Quite simply, it is a figure which values how much your startup is worth. The valuation of a startup takes into account every aspect of the startup including its assets, liabilities, intellectual property (IP), team, execution, idea, clients and revenue. All these things are considered before a figure is assigned to a startup and this figure represents the value of the entire startup.
What are the different methods of calculating startup valuations?
The valuation of a startup generally comes into picture when an entrepreneur is looking to either raise funds from an investor or trying to sell his company. Entrepreneurs, angel investors or VCs, all use different kinds of methods to value a startup.
Let's take a look at some of the most commonly used methods that are used to determine the valuation of a startup.
Comparison Method: The easiest method to calculate the valuation of your startup is the comparison method. You can assign a value to your startup without even understanding the nuts and bolts of startup valuations. In this method, all you have to do is look at similar startups that are working in the same domain, offers similar services and products as your startup and has a comparable growth as your own startup. The more parameters you have to compare, the better. So, by looking at the valuation of similar startups and companies at similar stages, you can assign a valuation to your own startup. It gives you a good starting point to get an estimation of what your startup could be worth.
Scorecard Method: The scorecard method helps you determine the valuation of a startup by taking into account everything the startup owns like its assets, liabilities, IP, team, clients, revenue and idea. Everything is then assigned a monetary value which is added up to arrive at a more comprehensive value of the company.
Discounted Cash Flow (DCF) Method: Unlike the above methods, the DCF Method uses future projections in terms of industry, growth, and revenue to arrive at the valuation of the startup today. In this method, the investors backtrack from future projections to arrive at a current value of any given startup.
Cost-to-Duplicate Method: In the cost-to-duplicate method, the valuation of a company is not based on what the startup is worth but on what it would cost to build your startup to a certain level. So, the investors calculate the money it would be required to get the startup to a certain level in terms of revenue, number of users or gaining a fixed amount of market share.
Daily Active Users/Monthly Active Users (DAU/MAU) Method: This is a method used by companies that don't really have any revenue to show which can be used to determine the valuation of the startup. In this method, investors look at the number of DAUs or MAUs the startup has and they assign a monetary value to each user which in turn is used to estimate how much the startup is worth. This is a method which was used by startups Instagram and Chingari.
Pre-Money Valuation and Post-Money Valuation: Simply put, pre-money valuation is the valuation of the company before it has raised any investment. The post-money valuation is the valuation of the company after it has raised an investment. So, if your company is worth $1 million before investment and you have raised $500,000 by selling 50% equity, your company will now have a post-money valuation of $1.5 million.
Disadvantages of valuing your startup too high or too low: If you end up overvaluing your company without any proof of concept or revenue model, no investor will be willing to invest. But on the other hand, if you end up undervaluing your company, you might end up giving too much equity too early to the investors.
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