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 via Scoring Methods
Another method for StartUp valuation are scoring models. These models are used in particular when the StartUp is still in the pre-revenue stage, i.e. does not generate any real revenues, yet. This also includes revenues where the real-world market situation is not applicable, such as crowd-funding or Kickstarter campaigns. Such revenues are merely an indication for market fit or potential, but are not reflecting the demand situation and response of unbiased customers.
- Scoring models attempt to detach the valuation of the StartUp from a financial point of view and value it based on qualitative characteristics and attributes.
- For this purpose, the investor defines a standard set of qualifying criteria, evaluates the characteristics of the respective StartUp individually and assigns a score. In addition, the investor can weight the characteristics accordingly on the basis of his experience. Depending on the overall score or different attributes and the investment approach, the investor valuates the company accordingly.
- The scoring models used today, for example by Bill Payne or Berkus, are often adapted by investors and modified to their own investment approach. In particular, the scope and weighting of the individual characteristics varies greatly from investor to investor, as does the valuation of the individual characteristics based on the investors experiences and benchmarks.
- Due to the high degree of individualization and different benchmarks, we believe it is difficult from a StartUp’s perspective to perform a consolidated valuation of its own company for several different investors using this method. However, it can be used to strengthen a valuation range based on one of the other methods.
