Douyin, the Chinese startup that owns Tiktok, was the highest-valued startup as of 2022. It was valued at $200 billion dollars, followed by SpaceX at $125 billion and ANT Group at $120 billion.

But what is startup valuation, and how is it determined? How do you value your startup? In this guide, we look at startup valuation, its key components, and best practices to help you understand what matters when valuing your startup.

What Is Startup Valuation?

Startup valuations are the estimated worth of a business in terms of cash or assets. In simple words, startup valuation is the process of determining the value of a startup company.

The value is typically used to raise investment capital, attract top talent, or sell the company. Several methods are used to value a startup, including the discounted cash flow method, the comparable company analysis method, and the venture capital method.

Components of Startup Valuation

The value of a startup is determined by several factors, including the industry and sector, revenue growth, profitability, cash flow, burn rate (or cost of operations), market size, competitive landscape, and the team’s skills.

Financial metrics such as revenue, profitability, and cash flow are the basis for most valuations. A startup’s burn rate measures how quickly a business spends money, which is an important indicator of future growth and performance.

But the team’s skills and experience are the most important components of startup valuation. The team should have an intimate understanding of the industry and have the leadership skills to manage a business through its growth phase.

Why Is Startup Valuation Important?

Startup valuation helps determine the value of a business and inform investment decisions. Valuations are typically used to set funding, equity splits, and benchmark performance.

Startup valuation also helps determine the price at which investors may be willing to invest in a company. Potential investors often require a certain valuation to be comfortable investing.

Valuation is a key factor when it comes to negotiating the terms of venture capital investment as it helps decide how much of the company investors will own. Additionally, it sets the parameters for what kind of return an investor should expect from their investment.

Companies that have higher valuations typically have more attractive investment opportunities, allowing them to raise more capital in a shorter amount of time.

Startup valuation also sets the stage for how future prospects will be evaluated.

What Matters In Startup Valuations

The most important factor when it comes to startup valuation is the company’s potential. Investors want to know that the company has a good chance of success and that it can generate a strong return on their investment.

Valuations are based on several key factors, including the company’s industry, stage of development, team dynamics, and competitive landscape. It’s also important to consider the company’s financials, such as revenue, expenses, cash flow, and debt.

Ultimately, investors want to be confident that the startup is in a position to succeed and that their investment will eventually provide them with a return.

Methods of Startup Valuation

There are many methods to value a startup. Here are some common ones.

Berkus Method

Created by Dave Berkus, the Berkus Method is an easy-to-use, qualitative method of startup valuation. It considers factors such as:

• Quality of the product or service
• Traction and potential for future growth
• Management team’s skills and experience
• Competitive landscape

The Berkus method is ideal for pre-revenue startups that have not started selling products or services yet.

Comparable Transactions Method

Another method of valuing a startup is the comparable transactions method. The method looks at similar acquisitions or investments made in the past and uses this data to derive an estimated value for the startup.

Suppose Company X, a SaaS company, was acquired for $20 million. It has 50,000 users. That means the per-user valuation of Company X was $400.

Now, if a similar SaaS company, Company Y, has 100,000 users, the estimated value of Company Y would be $40 million. This method is fairly straightforward and can provide an estimated value relatively quickly.

Scorecard Valuation Method

The scorecard valuation method is a more complex approach to valuing a startup. The method looks at and evaluates several indicators of success to arrive at an estimated value.

Each indicator is given a score, and the scores are then combined to get an overall score. The overall score is then used to derive an estimated value of the startup. The indicators could be:

• Competitive Environment: Up to 10%
• Product or Service: Up to 25%
• Growth Potential: Up to 15%
• Financials: Up to 20%
• Team and Management: Up to 10% 
• Intellectual Property: Up to 10%
• Marketing and Distribution: Up to 10%

Discounted Cash Flow Method

The DCF method for startup valuation involves taking the present value of all future cash flows generated by the company to arrive at a current valuation. It is based on the concept of the time value of money, recognizing that a dollar today is worth more than a dollar tomorrow.

In calculating the present value of future cash flows, the investor must make a number of assumptions, including future growth and profitability. Meanwhile, the First Chicago Method is an expansion of the DCF model, focusing on the value of a company’s equity by considering cash flows from all sources – debt, preferred stock, and common equity.

Risk Factor Summation Method

The risk factor summation method involves identifying and quantifying the various risks associated with the startup and then summing those risks to arrive at a valuation for the company. To use the risk factor summation method, you would first need to identify all of the risks associated with the startup, such as market risk, financial risk, operational risk, and so on.

Here are some common risk categories:

• Competition risk
• International risk
• Manufacturing risk
• Financial risk
• Legal/regulatory risk
• Technology risk
• Market risk
• Reputation risk
• Management risk
• Litigation risk

For each risk, you would then assign a value or “weight” based on its likelihood and potential impact on the company. 

Next, you would sum up the weights for all of the risks to arrive at a total risk score for the startup. The risk score can then be used to adjust the valuation of the company based on the level of risk involved.

Create Financial Models With Professionally-Done Valuations

An investor pitch backed by a sound financial model with a well-done startup valuation is key for getting investor attention. At Numberly, we create bespoke financial models that are tailored to your business’s needs and done according to industry standards.

Our experienced professionals will help you build accurate financial projections and investor-ready models. Get in touch with us today to learn more.