Startup Valuation
"Statup Valuation must be performed by a qualified valuation professional who is a Registered Valuers with IBBI.
We are experts in Start-up Valuation and Business valuation, we have a dedicated team of Registered Valuers and Chartered Accountants to help you unlock and find the True value of your company before going to the Investor.
We provide a Valuation Certificate for estimating your company's worth and to attract funding. We help in determining the investment and amount of stake dilution (Shares to be allowed). "
Get Free Consultation
Step
At Which Step Startup Valuation is Required
"To pool in funds from external sources such as VCs, angel investors , Venture Capitalist, Private Equity Firms, and Incubators, startups need to figure out the seed amount required.
This is where seed funding valuation comes into the picture."
Why Startup Valuation is important
Valuation matters to every startup because it helps in deciding the amount of equity an entrepreneur has to give to an investor in exchange for requisite funds.
Entrepreneur point of view: If a company has a higher valuation, it has to give a lesser amount of equity or shares to an investor in exchange for seed investment.
Investor point of view: It helps them to know how much company’s share they will receive in lieu of the funds invested during the seed stage. And they can gauge the amount of return they will receive on their invested amount.
Benefits
Why choose Vyapar Formations
We perform Valuation by Registered valuers with IBBI
We follow International Method of Valuation accepted worldwide
Our Valuation Certificate Accepted by Statutory Authorities
Our Valuation Accepted by all Investors/ Angel Investors/Venture Capitalist/PE Firms/Incubators.
We have Produced 1500+ Valuation Certificates
Documentation
Documentation required for valuation
Projected Profit & Loss Statements
Projected Balance Sheet
Peer Companies
Other details on the basis of type of Industry to which the company belongs
We provide assistance in preparing these documents as well
Journey
Journey of raising funds of any Startup
Startups need to go through different rounds of raising funds, which are
→ pre-seed,
→ seed and
→ series rounds.
If we talk about the seed stage, the timing of raising funds and the actual amount that one wants to raise holds the key.
Startup valuation can prove to be a real deal maker or breaker. Before proceeding with calculating the actual value of a company, founders need to have proper knowledge about how the entire process of startup valuation works.
If you quote an absurdly high figure to seed investors, even when there is no revenue generation, then the expectations will be quite high, and if a startup is unable to meet the high targets, it might have to raise funds at a lower valuation in the next round. This may prove negative in the long run, and the startup or founder might have a tough time convincing other seed investors or companies for seed funding.
Conversely, quote too low and the startup may end up giving a larger chunk of equity to investors, which will again prove negative.
Factors
Factors that influence the Investors at seed stage
Startups need to be ready with the following data along with Valuation to pitch Investors at seed stage
Traction
Reputation
Prototype
Distribution Channel
The Industry
Methods
How to value a Startup company with no revenue
"Startups are valued with different methods and approaches, this all depends on products, users, technology and revenue models.
Here Investor invests to earn return of their equity and they risk high on startups because early stage startups have no business experience, no established brand of their products and services, No Human Resources, illiquid Investments etc. The Future of Startups are uncertain, so valuing a startup can be little bit tricky.
Here we will discuss startup valuation at pre-revenue stage or revenue generation just commenced and gradually being scaled up.
Berkus Method
Berkus method evaluates a startup based on the business idea, the prototype of products or services offered, quality of the management team, strategic relationships or alliances, and sales forecasting. Each of these criteria is associated with a certain amount of money.
The Berkus Method is a simple estimation, often used for tech startups. It is a useful way to gauge value, but as it doesn’t take the market into account, it may not offer the scope some people desire.
Risk Factor Summation Method
The Risk Factor Summation Method or RFS Method is a slightly more evolved version of the Berkus Method.
There are 12 factors that are considered for the evaluation of the worth of new business. These factors are - management risk, stages of business, Legistation/political risks, manufacturing risks, sales and marketing, funding/capital raising risk, competition risk, technology risk, litigation risks, international risk, reputation risks, and potential lucrative risks. Every factor is analyzed as positive, negative, and neutral to determine the valuation. The registered valuers for valuation in India combine this method with other valuation processes for business valuation.
Discounted Cash Flow (DCF) Method
The discounted cash flow method indicates the fair value of a business based on the value of cash flows that the business is expected to generate in future. This method involves the estimation of post-tax cash flows for the projected period, after taking into account the business’s requirement of reinvestment in terms of capital expenditure and incremental working capital. These cash flows are then discounted at a cost of capital that reflects the risks of the business and the capital structure of the entity.
Venture Capital Method (VC Method)
The venture capital method allows a startup to evaluate the forecasted terminal value by establishing the return to be paid to an investor. It is well-suited for the pre-revenue startups involving pre-money valuation. The pre-money valuation is calculated by subtracting invested capital from post-money valuation, in which the post-money valuation is obtained by dividing terminal value with an expected return. It is the simplest method to calculate startup value. This method is suggested by most reputed fundraising for startups in India.
Cost to Duplicate Method
This approach is very realistic as it calculator the net worth of all the hard assets of a startup and determines the cost to replace it and re-establishing it somewhere else. The investor will fund the amount that is needed to duplicate that particular business. However, it is done for the time being and does not include the future asset valuation anyway.
Scorecard Valuation Method
It utilizes the comparison of the pre-money valuation of the startup by incorporating a scorecard. The average pre-money valuation of the startups in a region is calculated giving importance to certain criteria such as the size of the business, the strength of the central team, the technology used, competition, marketing channels, and investment options. The scorecard is made by assigning factors to each element and comparing it with a standard.
This the most the used method in valuation , the components being the Weighted Average Cost of Capital , Beta being the risk factor , Cost of Equity and other factors that are used to determine the present value of future cash flows
Business Stage Valuation
A quick range of validation needed by angel investors and venture capital firms in order to fund a startup. The business stage valuation method evaluates various stages of funding with respect to the risks of investing in a startup. It is based on the estimated company value, stage of development, business idea, management team, product prototype, and strategic alliance or partners in the business venture.
Startup valuation revenue multiple
In startup valuation revenue multiple method , registered valuers generally use, the two most reliable values
- Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
- Seller Discretionary Earnings (SDE).
EBITDA is used almost exclusively for companies larger than $5M in value and is calculated by adding interest, taxes, depreciation and amortization back to your net income. For businesses under $5M in value, Seller Discretionary Earnings (SDE) is typically used. SDE is the profit left to the business owner once all costs of goods sold and critical (i.e. non-discretionary) operating expenses have been deducted from gross income. Crucially, any owner salary can be added back to the profit number to reflect the true earnings power of the business. Essentially, SDE can be expressed with the following simple formula
SDE = Revenue – Cost of Goods Sold – Operating Expenses + Owners (Founders) Compensation ( i.e Directors Salary or any other compensation provided) This is the figure that we recommend you apply the multiple to when calculating your company’s value.
Steps
Steps involved in Startup Valuation
Startup valuation is the process of quantifying the worth of a company, aka its valuation. To value firms with negative earnings, little or no historical data and few comparables, the steps involved are essentially the same as in any valuation like in the case of other start ups. First Prepare the Estimated Future Cash flows and financial Statements of the Company
Forecast all Revenue Sources
Forecast All the Cost including both fixed Cost & Variable Cost
Forecast the Investment in Assets/ Capital Expenditure
Prepare Profit & Loss Account
Prepare Balance Sheet
Estimate the Funding Gap
Business Valuation by Registered Valuer
Approaches
Three Approaches in valuation of startup entities adopted by registered valuers
Going Concern Valuation
This value focuses on the overall earning potential of business entities. This value makes the assumption that business is a perpetual entity which is different from its promoters and will not be affected by any such external events.
Liquidation Valuation
It represents the amount received on selling off all the assets as well as settling liabilities. Intangible assets like goodwill, brand value, and so on, are certain important assets that need to be calculated appropriately in such method. -It enables to set a benchmark below which the business should not be valued, as the same would not yield any gain for the shareholders.
Market Valuation
It relates to the companies listed at the stock market. It represents the price at which the company is trading at a recognized stock exchange. For this method, it needs to be considered that the price of the security trading on the stock exchange is more a representation of the market sentiment instead of the actual state of business. This price cannot provide a complete picture of the fundamentals and potential of the security / stock.
How is Startup Valuation Determined
A startup is a new business with a unique value proposition for selling products, services, or ideas, and that has the potential for swift growth.
Startup companies receive different kinds of funding for supporting the business model to grow and build up.
There are various relevant options for fundraising for startups in India such as angel investors, venture capitalists, crowdfunding, bootstrapping, and others.
Usually, there needs to be a guarantor for raising funds for a startup business. The reason behind this is the stage of instability and non-profitability that prevailed until the startup reaches its break-even point. Therefore, the determination of startup validation becomes difficult.
For a mature business, the valuation process is very easy. To calculate the value, the company should compute all of their earnings, before adding taxes, interests, depreciation, and amortization. However, for the determining startup valuation, the registered valuers for valuation in India consider a set of positive and negative factors.
The positive factors include a reputation or brand value, customer traction, a prototype of the business, revenue generated till the time, supply and demand including distribution channels, and market value.
The negative factors for valuating a startup include low margins in price determination, poor industrial value, market competition, product offerings, and management of the business.
Conclusion
The Valuation has to done by a registered valuer only We are a team of registered valuer for valuation in India, regsitered with IBBI Registered Valuer u/s 247 of Companies Act, 2013 for Securities or Financial Assets Class.
Business Valuation Advisory provided in the following areas
- Valuation of Business / Firm
- Valuation of Intangibles such patents, copyrights, technical knowhow, franchise agreements, etc.
- Valuation of Shares under Companies Act, Foreign Direct Investments
- Valuation of Goodwill
- Valuation for Swap Shares in case of Amalgamation
- Start-up Valuation
- Valuation for Brands
- Valuation of Intellectual Property
- Valuation of Software
- Valuation of Debentures