Every year many new companies get their startup, and no one knows which company will do a profitable business in the future. To access the real value of a company is the process of valuation.
The process of valuation helps investors and founders to see so either the company is achieving its targets or not. There are many methods that answer the query of how to value a startup company with no revenue.
Traditional Valuation Vs. Modern Valuation
There are many ways to value a startup company. The traditional valuation method is EBITDA and mostly used method. But with time, new approaches are also observed to do a valuation task.
So let’s check out all the well-known methods of valuing a startup company.
EBITDA valuation Process
It combines different elements like net income, interest, tax details, depreciation, and amortization. While doing valuation through this process, all the ingredients are kept in mind.
EBITDA is a measurement of companies’ cash flow and comparing a startup company expenses and earnings.
Net Income + Interest + Taxes + Depreciation + Amortization= EBITDA
Modren Valuation Techniques
With time modern techniques have evolved and used to do a perfect valuation. The most common techniques of valuation are the following.
1. The Venture Capital Method
This method is both the easy one and can be the hard one too. You are surprised to read that quote, but that is the reality. In the venture method, the formula used to determine the value of a company is the comparison technique.
When we want to get a company’s proper valuation, we will require the same business and the same startup sold to determine the subject startup. Often this is very hard to find the exact business, especially in the case of a sole proprietorship.
There are many kinds of businesses in sole proprietorship or independent contractor, and you can not find a similar startup most of the time. In such businesses, the worth mostly depends on the ower how he deals with the buyers. The element of negotiation plays its role in this matter.
Nevertheless, this method is an excellent process to evaluate a business and understand its worth in the initial stages of the company.
2. ROI Valuation Method
ROI or Return on Investment is the method to access the profit that a company is making. By this method, the investor can foresee the company’s performance and decide whether they should invest in such a business.
It is a practical standpoint for investors’ perspective as they really want to know how their investors will return them. In most cases, ROI depends on the market. If the market is going right, the ROI can be positive.
3. DCF Valuation Method
Discounted Cash Flow is the method that you can apply to access the specific circumstance. When a company making a profit has not consistent in it and the future, there is no fixed ratio of such profits. This method applies.
Investors want to ensure a safe investment and well know the market. A market that is making a profit now can go to minus in the coming days. So by the DCF method, a valuation is made of the company’s ratio in future circumstances.
4. Berkus Method
The process of valuation of a startup takes place on five elements in the Berkus method. The total value of a startup can be $2M, and each element has a $500k value.
The very first element is the niche of the business. If it is good and trendy, the success ratio is more than normal. The second element to check is the team or working body. A skilled and experienced team can take business from the ground to the sky within no time. After that, the quilty of product and sellouts come in to play, and in the last, the management of this business considers.
This method is useful as it covers almost all the aspects of a startup business and develops a business valuation.
The Bottom Line
Doing a proper valuation is often complicated, especially when it is in the initial stages. Different methods analyze different aspects of the business.
Overall, it is not right to say that any method is better than the other but using multiple methods can result in a good valuation of your company.