Early stage & Start-Up valuation is considered an art by many. However, like all arts, methods, and best practices apply and bring the art forward over time. For early-stage business valuation, different best practices have been developed recently to account for the modernization of investing. Valuation guidelines encourage the use of several valuation methods as they analyze the business value from different angles and result in a more comprehensive and accurate view. The attached weighted average of five valuation methods looks at the value of a start-up & early stage company from 3 different points of view. (that is. Qualitative Aspects, Future Cash Flow Aspects and Investors Returns)
QUALITATIVE ASPECTS: (Scoreboard & Checklist Method)
Developed by American business angels to value the elements that guarantee future success in pre revenues and early-stage companies.
FUTURE CASH FLOWS: (DCF with Long Term Growth and DCF with Multiple)
The standard and most traditional method according to which s company is worth the cash that is going to generate in future.
INVESTORS RETURNS: (Venture Capital Method)
This method takes into account the required returns investors expect to earn when exiting a start-up in order to have a profitable portfolio.
The final valuation is computed as the weighted average of the five valuation methods. Different weights are applied according to the company’s development stage. (from Idea Stage to Expansion stage) Following are the default weight of the five methods(A)Scorecard method, B) Checklist method,) VC method, D) DCF with multiple methods and E) DCF with Long term Growth
- IDEA = A) 38%, B) 38%, C) 16%, D) 4%, E) 4%
- DEVELOPMENT= A) 30%, B) 30%, C) 16%, D) 12%, E) 12%
- START UP = A) 15%, B) 15%, C) 16%, D) 27% E) 27%
- EXPANSION= A) 6%, B) 6% C) 16% D) 36% E) 36%
Reasons for weights: DCF methods have more importance for companies with a financial track record (Expansion stage). Younger companies (Idea and Development stage) with no track record have more unreliable forecasts; for this reason, qualitative methods that are not based on projections should have a larger weight than DCF.
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