METHODS
Methods Abbreviation
Discounted Cash Flow Method DCF
Valuation by Multiple VM
Comparable Companies Method CT
Replacement Cost Method RC
Net Book Value Method NBV
Berkus Vale Method BM
Venture capital Method VC
DCF
When to use this method
The Discounted Cash Flow (DCF) method can be used in startup valuation when there are re
projections available for the startup. DCF is a popular valuation approach that estimates the
on its expected future cash flows. While DCF is often used for more established businesses w
can also be applicable to startups under certain circumstances:
Post-Revenue Startups
Startups that have already generated revenue and have a clear path to profitability can ben
are reasonable projections of future cash flows, DCF can help estimate the present value of
Predictable and Steady Cash Flows
If the startup's business model is relatively stable, and there is a high degree of confidence
projections, DCF can be used effectively. This is more likely to apply to startups in traditiona
revenue streams.
Mature Startups
Some startups might have been operating for several years and have a more predictable ca
could be a viable valuation method.
Tech Companies with Subscription Models
Tech startups with subscription-based revenue models may have relatively predictable and
has a strong customer base and low churn rate, DCF might be suitable.
Late-Stage Startups
Startups that have progressed beyond the early-stage and have substantial financial data a
candidates for DCF analysis.
Venture Capital or Private Equity Investor Preference
In some cases, venture capital or private equity investors may prefer using DCF for valuatio
more in-depth analysis of the startup's financial prospects and potential return on investme
up valuation when there are reasonable and reliable cash flow
n approach that estimates the present value of a company based
more established businesses with a track record of cash flows, it
s:
ar path to profitability can benefit from the DCF method. If there
estimate the present value of these cash flows.
s a high degree of confidence in the accuracy of cash flow
apply to startups in traditional industries with established
nd have a more predictable cash flow history. In such cases, DCF
ve relatively predictable and recurring cash flows. If the startup
suitable.
ve substantial financial data and revenue traction may be suitable
prefer using DCF for valuation, especially if they are looking for a
potential return on investment.
DCF - WEIGHTED AVERAGE COST OF CAPITAL (WACC)
WACC calculation notes Damodaran
Risk-free rate 2.0%
Equity risk premium 4.72%
Unlevered industry Beta 0.81
Gearing (ND / E) 56.4%
Relevered industry beta 1.15
Sub-total 7.4%
Size premium 0.5%
Country risk premium 0.5%
Specific risk premium 0.7%
Cost of equity 9.1%
Industry - Damodaran database 3.6%
Cost of debt 3.6%
Corporate tax rate 25.5%
Cost of Debt after tax 2.7%
Gearing (ND / EV) 36.0%
WACC 6.8%
Inflation - Local 3.5%
WACC (adjusted) 10.5%
2
Reference
3 Month T bill in USA
ERP for USA
Unlevered beta for industry
D/E for industry
Cost of debt for Industry
Official CIT rate (state + federal)
Official inflation at valuation date from Central bank
DCF
Fill blue cells only
Assumptions
Discount rate - WACC 10.5%
Sales YoY growth rate 7.0%
EBIT YoY growth rate 7.0%
Long term CF growth rate 1.5%
Corporate income tax rate 15.0%
Capital investment % of EBIT 15.0%
Annual sales (current year) 10,000
Current
Discounted Cash Flows year notes 2024
$
Sales 10,000 10,700
EBIT / Operating profit 2,000 2,140
Account receivable 1,700 17% 1,819
Inventories 1,000 10% 1,070
Account payables 1,300 13% 1,391
NWC projection 1,400 1,498
Corporate income tax (321)
Depreciation and other non-cash expenses 100
Net Working capital adjustments (98)
CAPEX adjustments (150) (321)
Free Cash Flow 7,250 1,500
Discount factor 1.0000 1.1052
DCF 7,250 1,357
Valuatio
Valuation notes n date
Cumulated DCF 6,033
Terminal Value 12,515
Discounted Terminal Value 7,588
DCF value of operations 13,621
Excess cash and marketable securities 1,600
Excess real estate 25
Investments in nonconsolidated companies 12
Tax loss carryforwards 12
Discontinued operations 40
Non-operating assets adjustments 1,689
Enterprise value 15,310
Financial liabilities (450)
Interest bearing debt (450)
Long-term operating provisions (50)
Nonoperating provisions (75)
Contingent liabilities (40)
Debt equivalents (165)
Convertible debt (25)
Employee stock options (50)
Noncontrolling
Hybrid interests
claims and non controlling interests (150)
(225)
Equity value 14,470
2
2025 2026 2027 2028
11,449 12,250 13,108 14,026
2,290 2,450 2,622 2,805
1,946 2,083 2,228 2,384
1,145 1,225 1,311 1,403
1,488 1,593 1,704 1,823
1,603 1,715 1,835 1,964
(343) (368) (393) (421)
(105) (112) (120) (128)
(343) (368) (393) (421)
1,498 1,603 1,715 1,835
1.2216 1.3501 1.4922 1.6493
1,226 1,187 1,149 1,113
VALUATION BY MULTIPLE
When to use this method
In startup valuation, both the EBITDA multiple method and the market multiple method are not typical
Startups are often pre-revenue or have limited financial data, making traditional profitability-based me
Instead, startup valuation tends to focus on methods that consider the startup's potential for future gro
certain situations where startups have achieved a certain level of maturity and financial stability, these
Late-Stage Startups
Startups that have progressed beyond the early-stage and have achieved significant revenue and positi
EBITDA multiple analysis. However, it is still relatively rare for startups to have sufficient EBITDA to supp
Profitable Startups
Some startups may achieve profitability relatively early in their lifecycle. If a startup has a solid track re
EBITDA multiple method could be considered as a supplementary valuation approach.
Comparable Analysis
The market multiple method, which involves comparing the startup to similar companies in the market
undergone funding rounds, can be relevant in some cases. This approach may be used to gauge how th
peers in the industry.
Late-Stage Funding Round
In later-stage funding rounds, investors may use market multiples derived from comparable companies
Exit Planning
For startups that are approaching an exit, such as an acquisition or IPO, market multiples of similar com
points in the negotiation process.
multiple method are not typically the primary approaches used.
ditional profitability-based metrics like EBITDA less applicable.
tartup's potential for future growth and profitability. However, in
ty and financial stability, these methods might be considered:
significant revenue and positive EBITDA might be more suitable for
have sufficient EBITDA to support this method.
If a startup has a solid track record of generating positive EBITDA, the
on approach.
milar companies in the market that have already been valued or have
may be used to gauge how the startup's valuation compares to its
d from comparable companies to negotiate a startup's valuation.
market multiples of similar companies can be used as reference
VALUATION BY MULTIPLE
EBITDA Multiple assumptions
Low 6.00
Medium 8.00
High 10.00
Valuation by EBITDA multiple notes Medium Low High
$
EBITDA non-adjusted 2,000 2,000 2,000
Non operating items 75 75 75
One-time items 20 20 20
Asset impairments (reversal) 15 15 15
Write-offs 5 5 5
Excess owner compensation 25 25 25
Share based compensation 5 5 5
GAAP adjustments (30) (30) (30)
IC fair prices adjustment 25 25 25
Adjustments 140 140 140
EBITDA adjusted 2,140 2,140 2,140
Multiple 8.00 6.00 10.00
Valuation 17,120 12,840 21,400
Cash on hand 1,600 1,600 1,600
Interest bearing debt 450 450 450
Net financial position 1,150 1,150 1,150
Valuation adjusted 18,270 13,990 22,550
REVENUE Multiple assumptions
Low 2.00
Medium 3.00
High 4.00
Valuation by EBITDA multiple notes
0
REVENUE non-adjusted
Non operating items
One-time items
GAAP adjustments
IC fair prices adjustment
Adjustments
REVENUE adjusted
Multiple
Valuation
Medium Low High
6,250 6,250 6,250
75 75 75
20 20 20
(30) (30) (30)
25 25 25
90 90 90
6,340 6,340 6,340
3.00 2.00 4.00
19,020 12,680 25,360
COMPARABLE COMPANIES METHOD
When to use this method
The Comparable Companies Method, also known as the Market Comparable M
can be used in startup valuation when there are comparable publicly-traded co
startups in the same industry or sector. This approach is commonly used in lat
achieved a certain level of maturity and have comparable companies with rele
available. Here are some situations when the Comparable Companies Method
Late-Stage Startups
Startups that have progressed beyond the early-stage and have achieved a re
or user base might be suitable candidates for the Comparable Companies Met
for startups that have reached a stage where they can be compared to establi
industry.
Sector or Industry Benchmarking
The Comparable Companies Method is useful when there are well-established
industry with publicly available financial data and valuations. These comparab
benchmarks for valuing the startup.
Funding Rounds and Investments
In later-stage funding rounds or when seeking investment from venture capita
Comparable Companies Method may be used to justify the startup's valuation.
valuations of similar startups or companies in the same space to assess the re
valuation.
Exit Planning
When a startup is considering an exit, such as an acquisition or an initial public
Companies Method can help in determining an appropriate valuation range ba
comparable companies that have recently undergone similar transactions.
IPO Valuation
In the case of a startup preparing for an IPO, investment banks and underwrite
Companies Method to estimate the potential valuation range for the IPO.
Lack of Historical Financial Data
Startups often have limited financial data, especially in the early stages. The C
be used when historical financial data is not sufficient for other valuation appr
Lack of Historical Financial Data
Startups often have limited financial data, especially in the early stages. The C
be used when historical financial data is not sufficient for other valuation appr
e Market Comparable Method or Market Multiple Method,
arable publicly-traded companies or recently funded
is commonly used in later-stage startups that have
able companies with relevant financial data and valuations
able Companies Method is used in startup valuation
and have achieved a reasonable level of traction, revenue,
mparable Companies Method. This method is more relevant
n be compared to established companies in the same
ere are well-established companies in the same sector or
uations. These comparable companies can serve as
ment from venture capital or private equity firms, the
y the startup's valuation. Investors may look at the
e space to assess the reasonableness of the proposed
uisition or an initial public offering (IPO), the Comparable
riate valuation range based on the valuations of
similar transactions.
ent banks and underwriters might use the Comparable
n range for the IPO.
n the early stages. The Comparable Companies Method can
for other valuation approaches.
n the early stages. The Comparable Companies Method can
for other valuation approaches.
COMPARABLE COMPANY VALUATION
amount in millions
Market Data Financials
Share Equity Net Enterpri
Company Price Value Debt se Value Revenue EBITDA
Company ACC LTD 520.0 3,200.0 150.0 3,350.0 8,000.0 500.0
Company A 2,540.0 4,200.0 250.0 4,450.0 7,870.0 2,607.9
Company B 750.0 4,250.0 350.0 4,600.0 773.2 1,954.0
Company C 600.0 3,150.0 50.0 3,200.0 283.3 752.7
Company D 350.0 3,180.0 60.0 3,240.0 242.4 712.0
Company E 1,500.0 2,800.0 15.0 2,815.0 4,233.7 924.2
Company F 1,200.0 3,000.0 15.0 3,015.0 952.1 516.9
Company G 352.0 2,250.0 160.0 2,410.0 455.8 223.2
Company H 285.0 2,365.0 50.0 2,415.0 2,208.8 342.0
Company I 1,650.0 2,185.0 800.0 2,985.0 1,845.6 578.1
High
Upper Quartile
Average
Median
Lower Quartile
Low
X COMPANY LTD Comparable Valuation
Revenue, EBITDA, P/E
Implied Enterprise Value
Net Debt
Equity valuation
Financials Valuation
Net EV/
Income Revenue EV/EBITDA P/E
200.0 0.4 6.7 16.0
111.6 0.6 1.7 37.6
72.6 5.9 2.4 58.5
80.7 11.3 4.3 39.0
20.1 13.4 4.6 158.2
70.5 0.7 3.0 39.7
96.0 3.2 5.8 31.3
112.0 5.3 10.8 20.1
92.8 1.1 7.1 25.5
91.4 1.6 5.2 23.9
13.4 10.8 158.2
5.9 6.7 39.7
4.3 5.1 45.0
2.4 4.9 34.4
0.7 3.0 23.9
0.4 1.7 16.0
EV/ RevenueEV/EBITDA P/E
5,250.00 1,200.00 500.00
12,558.1 5,828.4 17,221.1
150.0 150.0 150.0
12,408.1 5,678.4 17,071.1
REPLACEMENT COST METHOD
When to use this method
Replacement cost method or the cost to duplicate method are generally not the primary approaches
However, if for some specific reason the replacement cost method or the cost to duplicate method w
startup valuation, it could be in situations where the startup's business model is heavily reliant on tan
specific characteristics. These methods may be relevant in the following circumstances:
Not possible to reliable predict revenues
Many other methods comes for startup future earning expectaton. If it is hard to predcit expectatoin
forecast revenues in next one, two or three years than this method can be appled. Also, if the value r
method is higher than value from other methods, this method should prevail.
Pre-revenue stage
This case is connected with previous one. This is case that the startup even does not start to generat
revenue prediction is not probable.
Tangible Asset-Intensive Startups
If the startup's primary value comes from tangible assets and infrastructure (e.g., manufacturing com
with specialized equipment), the replacement cost or cost to duplicate method might provide some in
these assets.
Physical Product Development
Startups involved in the development of unique physical products with significant manufacturing and
find these methods helpful in estimating the cost of reproducing the product.
ot the primary approaches used in valuation.
cost to duplicate method were considered in
odel is heavily reliant on tangible assets with
rcumstances:
ard to predcit expectatoin or not realiable to
appled. Also, if the value resulted from this
ail.
n does not start to generate a revenue, and the
e (e.g., manufacturing companies or businesses
thod might provide some insights into the value of
nificant manufacturing and production costs might
ct.
REPLACEMENT COST METHOD
Performer Q2 21 Q3 21
Product development
Backend Name Surname 250
Frontend Name Surname 180 180
DevOps Name Surname
Security Name Surname 150
Security Supplier
UI / UX design Agency
UI / UX design Freelance agency
UI / UX design Freelance agency
UI / UX design Freelance agency 160 160
UI / UX design Freelance agency
Supervision Name Surname
App Name Surname
Payment integrations Name Surname
- - 340 740
Web Site Development
UI / UX design Name Surname 10
UI / UX design Supplier
UI / UX design Agency
Graphic Design Freelance agency 20
Wireframe Freelance agency 20 20
Dev Name Surname 520 520
SEO Name Surname
Content Name Surname 462 462
Content Name Surname
Content Name Surname
Content Name Surname
### ###
Legal - Admin-Management
Legal external Name Surname 10
Genear and HR Name Surname 50 50
ToC Name Surname
Privacy policy Name Surname 20
IC agreements Name Surname 20
Special agreements Name Surname
Labor agreements Name Surname
Legal Name Surname
Total
Margin
Final Valuation
Final Valuation in $ thousands
Q4 21 Q1 22 Q2 22 Q3 22 Q4 22 Q1 23 Q2 23 Q3 23 Q4 23 Q3 24 Q4 24 Total hours
60 528 528 528 528 528 528 528 528 528 528 5590
180 180 180 180 180 180 180 180 180 180 180 2340
0
150 150 150 150 150 150 150 150 150 150 150 1800
10 10 20 40
20 30 30 80
5 5
10 10
160 160 160 160 160 160 35 1315
10 45 55
9 9 9 9 9 45
40 120 120 120 120 520
30 30 60
560 ### ### ### ### ### 967 978 978 ### 978 11,860
150 160
30 100 30 160
40 40
20
20 20 20 20 20 20 20 20 20 220
520 520 520 520 520 520 520 520 520 520 520 6760
30 50 50 130
462 462 462 462 462 462 462 462 462 462 462 6006
0
396 396 396 396 396 396 2376
30 3 3 36
### ### ### ### ### ### ### ### ### 982 ### 15,908
30 30 30 30 130
50 50 50 50 50 50 50 50 50 50 50 650
40 40
30 88 138
15 35
462 462 462 462 1848
0
40 20 15 75
2,916
30,684
Hourly rate Total investment
90 503,100
55 128,700
55 -
70 126,000
70 2,800
70 5,600
70 350
70 700
70 92,050
70 3,850
55 2,475
55 28,600
55 3,300
897,525
30 4,800
50 8,000
35 1,400
30 600
70 15,400
150 1,014,000
30 3,900
75 450,450
-
30 71,280
300 10,800
1,580,630
120 15,600
70 45,500
35 1,400
30 4,140
70 2,450
20 36,960
-
70 5,250
111,300
2,589,455
12% 310,735
2,900,190
2,900
NET BOOK VALUATION METHOD
When to use this method
The Net Book Value (NBV) method is not commonly used in startup valuation. The Net Book Value
historical cost (or acquisition cost) and its accumulated depreciation. It is a metric used in accounti
the company's balance sheet.
The Net Book Value method is more relevant in the context of accounting and financial reporting, w
of assets and determining their value after considering depreciation over time. However, when it c
limited applicability for several reasons:
Startups Focus on Future Potential
Startup valuation is typically forward-looking, emphasizing the potential for future growth and pro
backward-looking and based on historical costs and depreciation, which may not accurately reflect
Intangible Assets
Startups often have significant intangible assets such as intellectual property, brand value, and tech
by the Net Book Value method. These intangibles play a crucial role in the startup's value but are n
on historical cost and depreciation.
Depreciation Not Always Applicable
Startups frequently invest in assets with a long useful life, such as software or technology infrastruc
be a significant factor, rendering the Net Book Value less informative for valuation.
Early-Stage Startups
Many startups are in their early stages and may not have significant tangible assets recorded on th
Value method irrelevant for their valuation.
Market-Driven Valuation
Startup valuation often relies on market-driven methods such as the Discounted Cash Flow (DCF) m
Venture Capital Method, which consider the startup's potential for revenue growth, market share,
valuation. The Net Book Value of an asset is the difference between its
It is a metric used in accounting to represent the asset's current value on
nting and financial reporting, where it helps in tracking the historical cost
over time. However, when it comes to startup valuation, this method has
ntial for future growth and profitability. The Net Book Value method is
hich may not accurately reflect the startup's potential value.
property, brand value, and technology, which are not adequately captured
n the startup's value but are not represented in the balance sheet based
ftware or technology infrastructure. In such cases, depreciation may not
for valuation.
tangible assets recorded on their balance sheets, making the Net Book
Discounted Cash Flow (DCF) method, market comparables, or the
evenue growth, market share, and scalability.
NET BOOK VALUATION METHOD
Fair market
value
Balance sheet notes At Valuation date Adjustments
$
Intangible assets 750
Tangible assets 1,250 250
Investments 50 215
Other fixed assets 150
Fixed assets 2,200 465
Inventories 200
Account Receivable 850 (200)
Cash 55 150
Short term investments 120
Other short term assets 170
Current assets 1,395 (50)
Total assets 3,595 415
Shareholders equity 50
Retained earnings (loss) 2,330 315
Equity 2,380 315
Long term liabilities 500
Trade payables 250 100
Financial liabilities 340
Other liabilities 125
Current liabilities 715 100
Total Equity and liabilities 3,595 415
Check 0 0
Valuation
Equity value after FMV adjustments 2,695
Adjusted
750
1,500
265
150
2,665
200
650
205
120
170
1,345
4,010
50
2,645
2,695
500
350
340
125
815
4,010
0
BERKUS METHOD
When to use this method
The Berkus Method is a rule-of-thumb valuation approach for early-stage startu
angel investor and venture capitalist. The method simplifies the valuation of pre
range of dollar values to various qualitative risk factors. The method recognizes
metrics might not be applicable to startups that may not yet have revenues or
How the Berkus Method Works:
Sound Idea (Basic Value): If there's a sound business idea, assign a base value.
Prototype (Reducing Technology Risk): If there's a prototype that works, add an
Quality Management Team (Reducing Execution Risk): If there's a quality manag
value.
Strategic Relationships (Reducing Market Risk): If the company has established
customers, add another value.
Product Rollout or Sales (Reducing Production Risk): If the company has a produ
value.
For each of the criteria the startup meets, a predetermined value (which can va
or investor's beliefs) is added to the startup's valuation. The total gives a rough
When Should the Berkus Method Be Used?
The Berkus Method is best suited for:
Early-stage startups: Especially those in the pre-revenue phase where traditiona
apply.
Startups in industries where comparable valuations are hard to find: In such cas
provide a better indication of the startup's potential value.
Situations where a quick, rule-of-thumb valuation is needed: Such as initial conv
potential investors.
However, like all rule-of-thumb methods, the Berkus Method has its limitations.
values assigned to each criteria can vary widely. For detailed negotiations or as
sophisticated valuation methods may be preferred.
ch for early-stage startups, developed by Dave Berkus, an
lifies the valuation of pre-revenue startups by assigning a
. The method recognizes that traditional financial valuation
ot yet have revenues or earnings.
ea, assign a base value.
type that works, add another value.
f there's a quality management team in place, add another
ompany has established strategic relationships or
he company has a product rollout or sales, add another
ned value (which can vary based on the specific industry
. The total gives a rough estimate of the startup's value.
e phase where traditional financial metrics might not
hard to find: In such cases, qualitative factors might
ue.
eded: Such as initial conversations between founders and
ethod has its limitations. It's a subjective approach and the
tailed negotiations or as startups mature, more
BERKUS METHOD
Characteristics
Sound Idea (Basic Value)
Prototype (Reducing Technology Risk)
Quality Management Team (Reducing Execution Risk)
Strategic Relationships (Reducing Market Risk)
Product Rollout or Sales (Reducing Production Risk)
Valuation
Sound Idea (Basic Value)
Idea addresses a clear and identifiable problem or need in the market
The problem is significant enough that people are willing to pay for a
solution
Implementation stage risks (financial, technical)
Scalabiliy of idea
How does the product or service differentiate from existing solutions?
Are there barriers to entry that can prevent competitors from easily
copying the idea?
Is there a clear revenue model associated with the idea?
Can this idea achieve profitability within a reasonable timeframe?
Does the idea face significant regulatory and legal hurdles?
Placeholder
Placeholder
Placeholder
Prototype (Reducing Technology Risk)
Demonstration of feasibility
Suitable for early market testing, gaining valuable feedback
While the prototype might work on a small scale, can the technology
or product be scaled up to meet potential market demands
Is the prototype user-friendly?
Does the prototype operate reliably, or does it crash or fail under
certain conditions?
Ability for integrations with other systemts
Can the prototype be reproduced efficiently, especially in mass
quantities, without significant changes to the design or functionality
Has the startup used the prototype to gather feedback
Has the startup used the prototype to gather feedback
IP protections risks
Placeholder
Placeholder
Quality Management Team (Reducing Execution Risk)
Deep understanding of the industry, product, and market dynamics
The ability to set and drive towards a long-term vision
Skills in managing day-to-day operations efficiently
The capacity to inspire, motivate, and lead the team
Effective and timely decision-making abilities
flexible and adaptive to changes
understanding of the financial aspects, including budgeting, forecasting
Clear communication skills
Understanding of sales funnel of procutcs
Understanding of makrting channels
Risk that management leave the startup
Placeholder
Placeholder
Placeholder
Strategic Relationships (Reducing Market Risk)
Relations with industry experts
Relations with potential affiliates
Relations with suppliers
Relations with distributors
Relations with finance institutions
Placeholder
Placeholder
Placeholder
Product Rollout or Sales (Reducing Production Risk)
Pilot or beta version before a full-scale launch
Proof of Concept
Evidence that there's a demand for the product
Feedback reviews
Customer behavior in beta
Operational systems in place
Customer acquisition costs
Sales channels
Other marketing and R&D costs
Total addressable market volume
Total addressable market growth
Placeholder
Adjusted for
risks and
Adding value (max) opportunities Valuation
500,000 64% 320,833
500,000 62% 309,091
500,000 72% 361,538
500,000 59% 293,750
500,000 63% 312,500
2,500,000 1,597,713
Score (1-10) Weight
6.42
8
4
8
9
5
7
4
9
2
7
7
7
6.18
8
7
8
5
5
7
8
8
8
2
2
7.23
8
7
8
5
5
7
8
8
8
8
5
8
9
5.88
10
5
2
9
5
7
8
1
6.25
5
2
4
5
10
10
8
9
7
5
5
5
VENTURE CAPITAL METHOD
When to use this method
Starts by estimating the startup's exit value in the future (e.g., through an IPO o
The VC then determines the desired return on investment (ROI). For instance, if
years and estimates the exit value at $100 million, they would value the startup
This method often uses a combination of multiples and discount rates to arrive
The Venture Capital Method (VCM) for startup valuation is typically us
Early-stage startups:
This method is most applicable for startups that do not have a long history of e
young companies, traditional valuation methods like the Discounted Cash Flow
due to the high uncertainty of future cash flows.
Absence of Comparable Transactions:
In cases where there aren't sufficient comparable company transactions or trad
against, VCs might rely on the VCM to derive a valuation.
High-growth potential:
The VCM is often employed for startups with the potential for significant growth
either through an IPO (Initial Public Offering) or a strategic acquisition.
When the exit strategy is clear:
VCM is especially relevant when there is a clear exit horizon in sight, such as a
a defined period (e.g., 5-7 years).
Simplicity:
When VCs need a straightforward method to get a ballpark figure for a startup's
into complex financial models.
Negotiation Tool:
The VCM can be a tool for VCs to set the terms of the deal, especially regarding
wish to obtain in exchange for their investment. By setting a desired return on i
into a valuation number that aligns with their target ownership stake.
====
This method gives a simplistic view and doesn't account for many complexities
funding rounds, market changes, or varying growth trajectories. It's essential to
adjust based on other qualitative and quantitative factors.
====
This method gives a simplistic view and doesn't account for many complexities
funding rounds, market changes, or varying growth trajectories. It's essential to
adjust based on other qualitative and quantitative factors.
re (e.g., through an IPO or acquisition).
ent (ROI). For instance, if a VC wants a 10x return in 5
y would value the startup at $10 million today.
discount rates to arrive at present valuations.
luation is typically used in the following situations:
have a long history of earnings or cash flows. For very
e Discounted Cash Flow (DCF) might not be as effective
pany transactions or trading multiples to benchmark
n.
tial for significant growth and a subsequent high-value exit,
gic acquisition.
rizon in sight, such as a projected acquisition or IPO within
park figure for a startup's valuation without diving deep
eal, especially regarding the ownership percentage they
ting a desired return on investment (ROI), they can back
nership stake.
nt for many complexities, such as dilution from future
ectories. It's essential to use it as a starting point and
ors.
nt for many complexities, such as dilution from future
ectories. It's essential to use it as a starting point and
ors.
VENTURE CAPITAL METHOD
Parameter
Projected Year 5 Revenue
Price-to-sales ratio
Estimated Future Exit Value (Year 5)
VC's Desired ROI
Post-money Valuation Today
VC Investment
Pre-money Valuation Today
Step-by-step VC method application
1. Estimate the Startup's Future Exit Value
This is often based on projected revenues and industry-specific valuation multiples
2. Determine the VC's Desired Return on Investment (ROI)
This represents the multiple of their investment that VCs hope to receive upon exit.
3. Calculate the Post-money Valuation Today
Divide the estimated future exit value by the VC's desired ROI.
4. Calculate the Pre-money Valuation Today
Subtract the amount of investment the VC is making from the post-money valuation
Hypothetical Example:
Assumptions:
Projected revenues in Year 5 (exit year): $50 million
Industry average price-to-sales ratio: 5x
VC's desired ROI: 10x
Amount VC plans to invest: $2 million
See table above
Explanation:
Estimated Future Exit Value:
We take the projected revenues for Year 5 ($50 million) and multiply it by the indus
(5x) to estimate the future exit value, which comes to $250 million.
VC's desired ROI: 10x
Amount VC plans to invest: $2 million
See table above
Explanation:
Estimated Future Exit Value:
We take the projected revenues for Year 5 ($50 million) and multiply it by the indus
(5x) to estimate the future exit value, which comes to $250 million.
Post-money Valuation Today:
To calculate the post-money valuation today, we take the estimated future exit valu
the VC's desired ROI (10x). This gives us a post-money valuation of $25 million.
Pre-money Valuation Today:
The pre-money valuation is the value of the startup before the VC makes their inve
subtracting the VC's planned investment ($2 million) from the post-money valuation
money valuation of $23 million.
Value Explanation
50,000,000 $50 million
5 5x
250,000,000 $250 million (5 x $50M)
10% 10x
25,000,000 $25 million ($250M / 10)
2,000,000 $2 million
23,000,000 $23 million ($25M - $2M)
ication
y-specific valuation multiples (e.g., price-to-sales ratios).
ROI)
Cs hope to receive upon exit.
red ROI.
rom the post-money valuation.
) and multiply it by the industry average price-to-sales ratio
$250 million.
) and multiply it by the industry average price-to-sales ratio
$250 million.
the estimated future exit value ($250 million) and divide it by
y valuation of $25 million.
fore the VC makes their investment. We calculate this by
rom the post-money valuation ($25 million), resulting in a pre-
Explanation
Based on financial projections
Average valuation multiple for the industry
Future value of the company at exit
The return VC wants on their investment
Value of the startup after receiving the VC
investment
Amount VC plans to invest
Value of the startup before receiving the VC
investment
SUMMARY
Valuation results summary by all methods
Discounted Cash Flow Method
Valuation by EBITDA Multiple
Valuation by REVENUE Multiple
Comparable Companies Method (EV/EBITDA)
Comparable Companies Method (EV/REVENUE)
Comparable Companies Method (P/E)
Replacement Cost Method
Net Book Value Method
Berkus Method
Venture Capital Method
Final Valuation
14,470
18,270
19,020
5,678
12,408
17,071
2,900
2,695
1,598
23,000