For every founding team, one of the most important milestones for a successful funding round should be dealing intensively with the valuation of your own company. At this point, we would like to share some insights on the different valuation models with founders, which we generated from an investor’s point of view in our cooperations with StartUps and company valuations.
We always recommend founders to engage in different models for company valuation in order to be able to give a possible valuation range when approaching investors. The one specific company valuation of the StartUp does not exist but an average valuation range, which results from the calculation of different models and scenarios is the best way to adress this topic.
For the different methodes, either conclusive data, comparison with similar companies or a valuation of single assets is assumed for the valuation of companies. The valuation of StartUps is therefore a complex task, as these are companies that generally do not yet have any historical financial data, whose potential for success is often difficult to predict, and whose still young and partly non-transparent structure makes it difficult to establish comparability. Therefore, many investors use a considerable amount of their own experience and benchmarks in the valuation of a StartUp.
Nevertheless, the valuation of startups is crucial for investors and founders to understand the potential equity story of a company and to find the common ground for an investment deal.
Valuation models with discount factor
Another method for valuing StartUps is the “discounted cash flow” (DCF) method. This method takes into account the company’s future cash flows and discounts them to today’s value. However, this method is more difficult to apply because it depends on many assumptions and it is difficult to predict how the young company will actually develop in the future.
- The venture capital method already incorporates elements of a discount factor. For the (potential) value performance within a defined time span, the widely used method based on DCF models is also suitable. The formula to be used may appear somewhat daunting at first glance, but represents best possible scenarios of value performances and are not limited to today. A distinction must be made between the equity or entity method, in which either the value of future equity or the value of the entire company including the debt is determined. In both models, the basis are the expected future cash flows of the financial forecast, discounted to the present by the weighted cost of capital.
- Data for the individual formula components is provided to teams by internet research and capital market data. To account for the lower survival rate of a startup, risk premiums are usually added or the risk factors of the formula are put into context of the StartUp.
- With a little bit of effort and Excel skills, it is thus also possible for young companies to evaluate the financial scenario shown using a simplified DCF method.
- It should be noted that there is a high degree of uncertainty, as the calculation is based on planned figures that cannot be verified by historical data. However, this degree of uncertainty applies to almost all valuation models for StartUps (on some level for all company valuations) that are based on forecasts and value increase.
