We can proudly say that today we are in the era of startups. India is one the third largest country in the world in terms of numbers of startups. We can easily see various startups starting around us. In other words we can say that we all are surrounded by some startups.
If you have an idea and you want to execute it, but the problem is funding, you don’t have sufficient funds or resources to start your business to pursue your idea, so you need to go to the investors and ask them for the funds or the investment. Now the concern is that how much fund do you required and what percentage of the shares you are willing to offer them in return? It is obvious that if someone will give you the investment or the funds then he/she will ask something in return i.e. some percentage of shares in your business. You don’t have any idea that what is the value of your startup? What percentage of equity you need to offer to the investors and at what valuation? Then don’t worry, here you will get multiple methods which will surely help you out to find out the right and correct valuation of your startup.
Methods for startup valuation:
- Score Card Method:
As the name suggests, what you have to do here is, to pick up those companies of same categories as yours, which is in same industry and at same stage as well. Then you have to acquire the information that how much investment they got from the investors and at what valuations? Write down the valuations of these companies and then calculate the average valuation of these startups. Now the venture capital or the angel investor will analyze your management skills, financial skills, business model, cash inflow, your core competence, unique selling point of your product or service, etc. On the basis of these calculations they will add or subtract some amount of percentage from the average valuation, then this will be the valuation of your startup.
For example: If the average valuation of the startups of same categories as of yours is 10 million and suppose the investors analyzed all other factors of your startup and decided to add more 10% of the average valuation, then the value of your startup will be 11 millions [10 million + 1 million (10% of 10 millions)].
- Venture Capital Method:
This is one of the commonly used method for calculating the value of startups. This method is basically depends upon the revenues, growth plan and the potential of generating future outcomes by your idea or startup in next few years.
For example: If the sales of your business is 10 millions and the investors thinks that the figure of sales will be 10 times in the next 5 years i.e. 100 millions and the expected rate of return of the investor is 100% per annum. Then the valuation of your startup after 5 years is 100 millions. But this valuation is after 5 years, now the question is that what is the current valuation? Current valuation of your startup is 3.125 millions.
These are the two methods which are mostly used by the entrepreneurs and the investors for estimate the value of the businesses. Hope this will help you to find out the right valuation of your startups.