If your business is a startup, there are several ways you can value its worth. below are some of the valuation methods for startups:
MARKET CAPITALIZATION
One of the simplest models for startup valuation is this one. The total dollar market value of a company’s outstanding shares is determined by market capitalization. Compared to overall asset or income data, it is a much more reliable measure. The market cap is a dependable way for investors to quickly gauge a company’s size and identify potential dangers. Price per share times the total number of outstanding shares equals market capitalization. According to their market capitalization, companies are grouped. A suggested range is as follows:
$30 million to $2 billion – Small cap
$10 billion or more – Large cap
$2 billion – $10 billion – Mid cap
Consider the case of two businesses A and B, each worth $2 billion. 20 million shares of Company A are trading at $100, whereas 200 000 shares of Company B are trading at $10,000 each. From the perspective of an investor, Company A is significantly more functional and stable within the sector. Only after a firm goes public through an IPO does its market cap become known. Before reaching this point, a startup must work with a reputable valuation firm to determine a realistic business value utilising different startup valuation methodologies. The startup decides how many shares to issue and at what price based on this data. If a corporation has $10 million in revenue, it might choose to
issue 1 million shares at $10 each or 2 million shares at $5 each.
Once a startup goes public, market forces control the price of its shares. The price of its shares is influenced by supply and demand for its goods and services. Share prices rise when demand is stronger, whereas stock prices decrease when demand is lower. The market cap turns into a real-time assessment of a company’s value once it begins trading on the stock market.
TIMES REVENUE METHOD
This approach of startup valuation is used to determine the possible revenue range of a business. Finding the “max-value” or “ceiling” for a specific firm is the notion. For this calculation, the real revenue data for a given time period (such one fiscal year) is taken into account. This value is multiplied by a certain amount. With the Times Revenue Method, a company’s valuation can be 1x, 2x, 3x, or even less than 1. The multiplier value is influenced by the sector’s economic development. A booming sector like AI might have 3x revenue whereas a service sector might only be eligible for 0.5x.
It’s critical to remember that while this startup valuation methodology bases calculations on a company’s overall revenue, it may not be entirely accurate. Profits and revenue are not the same thing. great revenues do not always translate into great profitability. However, this approach gives investors a place to begin when estimating properly the
company’s potential for future growth.
EARNINGS MULTIPLIERS
This startup value methodology is compared to other startups in the same industry. This strategy is used by investors to determine whether the target company’s stock price is too expensive compared to its market competitors. Data on previous stock prices is also taken into account. With this approach, the current stock price of the target firm is compared to its earnings per share (EPS). As an illustration, if the price of a company’s stock is $100 and its earnings per share are $10, the earnings multiplier is $100/$10, or 10 years. Simply put, this is said to be the case when a company’s stock is trading at 10 times its earnings.
As can be seen, approaches using earnings multipliers do not offer a precise estimate. They tend to provide relative information on stock exchange-trading companies. These indicators are used by investors to select the most cost-effective stocks that have the potential for future profits.
BIBLE VALUE This startup valuation methodology, often known as “net book value,” only displays the carrying value of a company’s assets on its balance sheet. Even though this method is not the most precise for valuing your firm, it is quick and simple to compute and will give you a general idea of its worth. The formula is as follows: Book value per share is calculated by dividing the common shareholders’ equity by the number of preferred shares.
Book value has two functions.
In the event of a company’s liquidation, it indicates the value of the assets to which shareholders are entitled.
This value, when compared to the market worth of the company, shows if the stock price is reasonable.
Make sure to note which assets (such as fixed assets, intangible assets, etc.) may be subject to fair market adjustments as well as whether other assets or liabilities are already at fair value (such as cash and cash equivalents, accounts receivable and payable, etc.).
LIQUIDATION VALUE
Similar to the book value model in that it only takes into account physical assets like machinery, stock, real estate, etc. In this approach, intangible assets are not taken into account. As a result, liquidation value is always higher than salvage value but always lower than book value.
Most assets are sold at a loss during a liquidation. As a result, investors use the liquidation value to appraise a possible investment to give themselves a realistic estimate of the returns they may anticipate in the event that the firm goes out of business.