How can founders value their startup if it’s pre-revenue? Vuk Vegezzi from BV4, a certified startup valuation company, selected and described two popular valuation models that can be applied to startups. In addition, he gave insights into BV4’s proprietary model that focuses on early-stage startups.
This article is based on our webinar about the early-stage valuation that you can now watch on our Youtube channel.
Valuation of an early-stage startup is not an exact science… it’s more of an art. It doesn’t mean that there is no possibility to back up your findings with data and run a proper analysis. It just means that – at the end of the day – it’s a negotiation between two entities, an investor and a startup, and they both will have to find a deal that works.
BV4 is a certified, independent startup valuation company using its own valuation methodology that is based on three different models: the Discounted Cash Flows, the Market Comparables, and the BV4 Model (proprietary model). Let’s have a quick look at each of these models.
Discounted Cash Flows
The DCF method looks at the financial projections, expected profitability, working capital, and future investment needs to determine the net present value of the startup. It compares cost ratios to similar companies, develops scenarios, and weights them according to their probability of occurrence. The model is best for describing the value and cost drivers and estimating the intrinsic value of the business. However, it is sensitive and biased towards assumptions. The key valuation drivers of the DCF are threefold: discount rate (WACC), the calculation (or not) of a terminal value (for startups, an EV/Sales multiple is more generally used), and finally the valuation date.
“Valuation of the early-stage startup is not an exact science… it’s more of an art.”
Market Comparables
The market approach is based on a selected sample of comparable transactions from a pre-defined population according to different criteria (company stage, technology, industry, value proposition but also use of funds, traction, and past track record). Relative valuations are independent of assumptions but they neglect timing and market sentiment as well as other soft factors.
BV4 Model
BV4’s proprietary model is a modified three-stage dividend discount model. Variables are estimated by using over 200 observable, measurable, and quantifiable parameters in 20 business-relevant subcategories. The impact of the parameters on the model variables is continuously optimized according to observed transactions from the BV4 database consisting of over 13.000 startups. The model includes qualitative and quantitative factors describing the substance, as well as the potential value of the startup but it incorporates the model risk.
Soon you can expect a new article from the series. Next time we will cover the key valuation drivers from the founders’ perspective. Stay tuned!