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Top 10 Valuation Methods for Start-Up Companies
Colleagues,
As posted in the "Startup Professional Musings" ... When presenting a start-up firm to potential investors, you will eventually get to the question that often stumps the inexperienced entrepreneur: “What is your company’s valuation?”...
... Many entrepreneurs stumble at this point, losing the deal or most of their ownership, by having no answer, playing coy, or quoting an exorbitant number...
To answer that question, Martin Zwilling, CEO & founder of Startup Professionals, Inc., and Managing Partner of Southwest Software Ventures & and Consulting, offers these “Top Ten Techniques” for start-up valuation:
1. Place a fair market value on all physical assets (asset approach). This is the most concrete valuation element, usually called the asset approach...
2. Assign real value to intellectual property. The value of patents and trademarks is not certifiable, especially if you are only at the provisional stage. A “rule of thumb” often used by investors is that each patent filed can justify a $1M increase in valuation.
3. All principals and employees add value. Assign value to all paid professionals, as their skills, training, and knowledge of your business technology is very valuable. Back in the “heyday of the dot.com startups,” it was not uncommon to see a valuation upped by $1M for every paid full-time professional programmer, engineer, or designer.
4. Early customers and contracts in progress add value. Every customer contract and relationship needs to be monetized, even ones still in negotiation. Assign probabilities to active customer sales efforts, just as sales managers do in quantifying a salesman’s forecast...
5. Discounted Cash Flow (DCF) on projections (income approach). In finance, the income approach describes a method of valuing a company using the concepts of the time value of money. The discount rate typically applied to start-ups may vary anywhere from 30% to 60%, depending on maturity and the level of credibility you can garner for the financial estimates.
6. Discretionary earnings multiple (earnings multiple approach). ... multiply earnings before interest, taxes, depreciation and amortization (EBITDA) by some multiple. A target multiple can be taken from industry average tables...
7. Calculate replacement cost for key assets (cost approach). The cost approach attempts to measure the net value of the business today by calculating how much it could cost for a new effort to replace key assets.
8. Find “comparables” who have received financing (market approach). Another popular method to establish valuation for any company is to search for similar companies that have recently received funding...
9. Look at the size of the market, and the growth projections for your sector. The bigger the market and the higher the growth projections are from analysts, the more your start-up is worth. For this to be a premium factor for you, your target market should be at least $500 million in potential sales if the company is asset-light, and $1 billion if it requires plenty of property, plants and equipment.
10. Assess the number of direct competitors and barriers to entry. Competitive market forces also can have a large impact on what valuation your company will garner from investors. If you can show a big lead on competitors, you should claim the “first mover” advantage. In the investment community, this premium factor is called “goodwill” (also applied for a premium management team, few competitors, high barriers to entry, etc.). Goodwill can easily account for a couple of million dollars in valuation.
Read on at: http://blog.startupprofessionals.com/2009/10/startup-valuation-top-...
ENJOY!
CC
As posted in the "Startup Professional Musings" ... When presenting a start-up firm to potential investors, you will eventually get to the question that often stumps the inexperienced entrepreneur: “What is your company’s valuation?”...
... Many entrepreneurs stumble at this point, losing the deal or most of their ownership, by having no answer, playing coy, or quoting an exorbitant number...
To answer that question, Martin Zwilling, CEO & founder of Startup Professionals, Inc., and Managing Partner of Southwest Software Ventures & and Consulting, offers these “Top Ten Techniques” for start-up valuation:
1. Place a fair market value on all physical assets (asset approach). This is the most concrete valuation element, usually called the asset approach...
2. Assign real value to intellectual property. The value of patents and trademarks is not certifiable, especially if you are only at the provisional stage. A “rule of thumb” often used by investors is that each patent filed can justify a $1M increase in valuation.
3. All principals and employees add value. Assign value to all paid professionals, as their skills, training, and knowledge of your business technology is very valuable. Back in the “heyday of the dot.com startups,” it was not uncommon to see a valuation upped by $1M for every paid full-time professional programmer, engineer, or designer.
4. Early customers and contracts in progress add value. Every customer contract and relationship needs to be monetized, even ones still in negotiation. Assign probabilities to active customer sales efforts, just as sales managers do in quantifying a salesman’s forecast...
5. Discounted Cash Flow (DCF) on projections (income approach). In finance, the income approach describes a method of valuing a company using the concepts of the time value of money. The discount rate typically applied to start-ups may vary anywhere from 30% to 60%, depending on maturity and the level of credibility you can garner for the financial estimates.
6. Discretionary earnings multiple (earnings multiple approach). ... multiply earnings before interest, taxes, depreciation and amortization (EBITDA) by some multiple. A target multiple can be taken from industry average tables...
7. Calculate replacement cost for key assets (cost approach). The cost approach attempts to measure the net value of the business today by calculating how much it could cost for a new effort to replace key assets.
8. Find “comparables” who have received financing (market approach). Another popular method to establish valuation for any company is to search for similar companies that have recently received funding...
9. Look at the size of the market, and the growth projections for your sector. The bigger the market and the higher the growth projections are from analysts, the more your start-up is worth. For this to be a premium factor for you, your target market should be at least $500 million in potential sales if the company is asset-light, and $1 billion if it requires plenty of property, plants and equipment.
10. Assess the number of direct competitors and barriers to entry. Competitive market forces also can have a large impact on what valuation your company will garner from investors. If you can show a big lead on competitors, you should claim the “first mover” advantage. In the investment community, this premium factor is called “goodwill” (also applied for a premium management team, few competitors, high barriers to entry, etc.). Goodwill can easily account for a couple of million dollars in valuation.
Read on at: http://blog.startupprofessionals.com/2009/10/startup-valuation-top-...
ENJOY!
CC
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