Young company or start-up valuations can be problematic. Key valuation problems can include little or no financial history, dependency on one or more key people and private capital to make the firm a success, often little or no revenue. Another key issue is the likelihood of failure. According to the Australian Bureau of Statistics, of the new companies established in the 2020 financial year, only 50% to 30 June 2023 survived. So how do you value a start-up?
A key focus for start-up valuations is understanding the business story. The narrative. What is the potential total market value for the industry and what percentage of the market can the business realistically expect to achieve? How long will it take to become stable and profitable? What is the growth curve?
Often start-up valuations are required to raise capital and so the question is more about what price can we expect an investor to buy in at. Price is a function of supply and demand, mood, momentum, and appetite in the market. Key start-up valuation issues become what price have shareholders invested at before, what is the appetite for investment, are there comparable investments? Importantly how the price and equity interest demanded now can potentially impact the ability to raise capital in the future. The valuation may change as funding level changes : pre-seed, seed and Series A.
Start-up valuations methods
Funding providers often refer to valuation rule of thumb methods, including the Berkus method and the venture capital method:
- Berkus method. The Berkus method is a simple qualitative early-stage method developed by the venture capitalist Dave Berkus that focuses on risk factors rather than projections. The method attributes a value of between zero to $0.5 million for each of five key areas: sounds idea, quality management team, prototype, strategic relationships, and product rollout.
- Venture Capital method. Developed by American academic Bill Sahlman, the Venture Capital method provides a future looking, simple step process. The process involves identifying the funding required today, forecasting future earnings, determining the time of exit, calculating earnings multiple at exit and exit value, then discounting the exit value to a present value today,
Young firm and Start-up valuations engagements have included:
- Valuation and financial modelling for a start-up Airbnb style company related to the commercial property market , valuation required for capital raising.
- Valuation and pricing advice in relation to a health product start-up with the products manufactured under license and distribution primarily in Asia.
- Valuation of a technology company providing a marketplace for auto services including retail and fleet servicing; valuation required for the ATO in relation to undertaking a buy-back of Employee Share Scheme Shares and to issue new shares.
- Valuation of a technology-based infrastructure business in the biogas and renewable electricity market. Discounted cash flow valuation modelling on various projects to assist in capital raising.