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2023 | Buch

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A Practical Guide for Startup Valuation

An Analytic Approach

herausgegeben von: Sinem Derindere Köseoğlu

Verlag: Springer Nature Switzerland

Buchreihe : Contributions to Finance and Accounting

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book sheds new light on the most important contemporary and emerging startup valuation topics. Drawing on the first-hand professional experience of practitioners, professionals, and startup experts from various fields of finance, combined with a sound academic foundation, it offers a practical guide to startup valuation and presents applications, practical examples, and case studies of real startup ecosystems.

The book discusses pressing questions, such as: Why are startups in California are higher valued than those in New York? Or why do startups based in London receive higher valuations than those in Paris, Berlin, or Milan, even when they are based in similarly-sized economies, share the same industries, and often even have the same investors? Answering these questions, the authors present key topics, such as hierarchical and segmented approaches to startup valuation, business plans, and sensitivity analysis, many methods such as venture capital valuation, first Chicago valuation, scorecard valuation, Dave Berkus valuation, risk factor summation valuation, and discounted cash flow valuation, in addition to business valuation by data envelopment analysis and real options analysis, as well as critical conceptual issues in the valuation such as expected returns of the venture capital and price versus value concepts, among others.

The book will help angel investors, venture capitalists, institutional investors, crowd-based fractional investors, and investment fund professionals understand how to use basic and advanced analytics for a more precise valuation that helps them craft their long-term capital-raising strategy and keep their funding requests in perspective. It will also appeal to students and scholars of finance and business interested in a better understanding of startup valuation.

Inhaltsverzeichnis

Frontmatter

A Practical Guide for Startup Valuation: An Analytic Approach

Abstract

The world is changing, and startups are leading the charge. From SpaceX to Bytedance, startups are transforming industries and creating new markets at an unprecedented pace. These companies are often founded by visionary entrepreneurs who are not afraid to take risks and challenge the status quo. But the road to success is never easy, and the challenges facing startups are numerous. One of the most critical challenges is determining the value of a startup. Unlike established companies, startups have little to no financial history, and their future potential can be difficult to predict. As a result, the valuation of a startup can vary widely, with different investors and analysts arriving at vastly different valuations. Despite these challenges, startup valuation is a crucial aspect of the investment and entrepreneurial ecosystem. Understanding how to value a startup is essential for entrepreneurs seeking funding, investors looking for promising opportunities, and business professionals seeking to acquire or merge with startups.

Sinem Derindere Köseoğlu

Introduction to Startup Valuation: From Idea to IPO

Abstract

Startup valuation is a critical aspect of the entrepreneurial journey and one that requires a deep understanding of the complex and dynamic ecosystem in which startups operate. As the startup landscape continues to evolve, with new players, technologies, and funding models emerging all the time, the need for accurate and reliable startup valuation has never been greater. In this chapter, we aim to provide a comprehensive overview of the key topics and challenges related to startup valuation, drawing on industry insights to help entrepreneurs navigate this complex landscape with confidence and clarity.

In this first chapter of the book, we provide an overview of startups and startup valuation, discussing the different players in the startup ecosystem, explaining the fundamentals of valuation, and highlighting the importance of understanding startup valuation for entrepreneurs, investors, and accelerators. We also discuss the different methods used in startup valuation based on traditional and modern approaches such as discounted cash flow (DCF), relative valuation, Venture Capital, Scorecard, Berkus Method, and so on. This chapter also includes why it’s important for entrepreneurs to understand startup valuation, how it affects their fundraising efforts, and how it can impact their ability to grow their business. Additionally, the chapter also addresses some of the common challenges that arise in startup valuation, such as dealing with uncertainty and limited historical financial data. Overall, the chapter is planned to serve for the more detailed discussions that will follow in the rest of the book.

Sinem Derindere Köseoğlu, Adam Patterson

From Planning to Valuation: Mastering Business Planning and Sensitivity Analysis for Your Startup

Abstract

Starting a new business can be a daunting task, but having a solid business plan, building a good financial model, and performing sensitivity analysis can help mitigate risks and increase the chances of success. In this chapter, I discuss the importance of business planning and sensitivity analysis in startup valuation, as well as how to develop an effective business plan and build a financial model.

The chapter starts by defining the key components of a business plan, including the executive summary, market analysis, marketing strategy, financial projections, and implementation plan. The chapter also provides tips on how to write each section effectively, and how to tailor the plan to the needs of the startup and its target audience. Creating a solid business plan, building a financial model, and performing sensitivity analysis are critical for startups to succeed, but it can be challenging to apply these concepts to real-life scenarios. In this chapter, I take a deep dive into a real case study of a startup, and demonstrate how financial modeling and sensitivity analysis were used to develop a successful business plan and secure funding. The chapter also indicates how the financial model was used to create a proforma balance sheet and proforma income statement, which provide a snapshot of the company’s financial performance and position over time. By the end of this chapter, readers will have a practical understanding of how financial modeling and sensitivity analysis can be used to develop a successful business plan and drive value creation.

Sinem Derindere Köseoğlu

Valuation Versus Pricing: A Conceptual and Practical Guide to Estimate Economic Value for Early-Stage Companies Via DCF

Abstract

The valuation of startups and early-stage companies is often considered a point of debate between founders and investors. More so than in the broader private equity universe. Afterall, there is greater uncertainty involved in early-stage companies and their future performance. This article therefore aims to bridge the gap in this dialectic discussion by first providing the theoretic framework to conceptualise differences in value and pricing, perhaps a key driver of the debate which summarizes key challenges in startup valuation. The article then goes on to develop a straightforward practical approach for early-stage valuation, based on the traditional discounted cash flow method for business valuation, augmented with statistical analysis and market triangulation, and finally validated with the more conventional venture capital pricing method often employed in the industry. The objective of the article is to bring enhanced robustness, at a practical level to startup valuation, via a simplified step-by-step approach, and serve as an additional conversation starter in this increasingly important theme in modern corporate finance.

Adam Patterson

Hierarchical and Segmented Approaches to Startup Valuation: What They Are. Why They Work

Abstract

Why is it that startups in California attract higher valuations than those in New York? How do startups based in London attract higher valuations than those in Paris, Berlin, or Milan, even when based in similarly-sized economies, share the same industries and many of the same investors? While classical economic theory describes that valuations are based on revenues, growth rates, and risk-adjusted discount rates, valuation of startups often proves the exception to the rule. Whereas startup valuations are influenced by revenues, stage of development, business-risks, and macroeconomic conditions, the specific valuation-impacts are traditionally a black box. Given that valuations are often undisclosed, roles played by other factors (economic geography, sector, and intellectual property) can often only be guessed at. This study is a deep dive and how-to guide outlining methods and approaches for application of segmented hierarchical startup-valuation and can be applied using existing data and valuation-models.

Max Berre

Analysis of Startup Valuation Methods: Understanding the Investor’s Perspective

Abstract

Valuation is a crucial aspect of startup financing, as it determines the company’s worth and potential return on investment. However, valuing a startup can be challenging due to several factors. Firstly, startups often lack a significant financial history and data, making it challenging to assess their future performance. Additionally, the valuation of a startup can be subjective and heavily dependent on the investor’s perception of the company’s potential. This subjectivity can lead to varying valuations from different investors, creating difficulties in determining the accurate value of the startup. Another challenge in valuing startups is the unpredictable nature of the market. Startups operate in a highly dynamic and volatile market, making it challenging to predict future revenue growth and profitability accurately. This unpredictability can lead to over or undervaluation of the company, which can have a significant impact on its future financing and success. In order to find the value of a startup, various methods have been formulated such as Comparable Company method, Asset-based valuation method, Discounted cash flow (DCF) method, Scorecard method, and Venture Capital Method. This chapter discusses some of the most popular methods of valuation along with illustration.

Faisal Usmani, Mohd Sarim, Atif Ghayas

Venture Capital Method

Abstract

The venture capital method (VC Method) is one of the most used valuation methods in the venture capital industry. This chapter starts with identifying the reasons behind why venture capital method is so widely adopted. This chapter discussed the venture capital method, along with a case. Some of the critical elements in venture capital method are deciding the quantity of investment, estimating the exit value, calculating the target multiple of the money, valuing the portion held by the VC in the startup, incorporating fund management and carried interest into the valuation, valuing the interested of general partner vs limited partners and deciding on the investment. This chapter touches are the above points and more.

Amar Rapaka

The First Chicago Valuation Method

Abstract

The First Chicago valuation method can be seen as a variation of the discounted cash flow (DCF) methodology. It provides a differentiated approach to analyzing companies at different stages in their lifecycle, further helping you to grasp the uncertainty involved. A further benefit of this approach is that it generates a variety of payoff scenarios for the company. Traditionally, three scenarios are constructed—the best, the base, and the worst case—and each scenario is assigned a probability. The valuation result is derived from a probability-weighted average of all three scenarios, so it includes both possible gains as well as potential losses in order to provide a precise valuation. This method is generally utilized by venture capitalists and private equity investors to appraise private companies because it incorporates both upside potential and possible downsides.

Saeid Mashhadi

Scorecard Method of Valuation “The Subjective Analysis of Valuation”

Abstract

In the last 30 years after the invention of computer, the internet coupled with the contributory factor of various countries opening to the liberalization of the economy, which has resulted in globalization. This is a key factor which is influencing all of us to look at the entire globe as a marketplace for most of the businesses. One of the offshoots of this evolution in the business world has inspired us to percieve the simple terminology such as “Start-up” as something really fancy which is very good and complementary for an entrepreneur.

And next comes investing. There were times when you have to invest your own money to start a business or borrow from friends and family, the next possibility is to approach the bank, and of course you have initial public offering (IPO) route for raising equity which was the choice for a matured and successful businesses. However it’s been quite sometime in the various countries like in the US, the private investment has been highly lucrative, which has emerged as a trend in other parts of the world later.

Important change was made to the regulations related National Securities Markets Improvement Act (NSMIA) of 1996 in the US. This enables private firms to sell securities to “qualified purchasers” (e.g., in-situations or accredited investors) exempting these deals from state-level regulations which are known as blue-sky laws (while public firms were exempt from these state laws). The changes to the NSMIA led VC and PE funds raise capital smoothly. These developments and regulatory changes in the US increased the investors investing in the Start-ups at various stages. Similar appropriate changes in regulations in various parts of the world have given way for increased venture capitalists and private investors investing in the Start-ups.

Need for qualitative methods of valuation—With the increase in the private investors getting into the private firms’ Start-up space, especially the need for qualitative methods of assessment was required when investing in the pre-seed and seed stage private companies, since there are no revenues and track records to assess the performance of the company. At this stage evolved qualitative methods of valuations such as First Chicago method, Venture Capitalists method, Scorecard Method, and Risk Factor Summation method. And in this section I will focus on the Scorecard method of valuation.

Nataraja Nanjundaiah

Dave Berkus Method

Abstract

Dave Berkus Method provides a framework for valuing early-stage startups and depicts a more holistic view of the company’s potential value and risk reduction for an investor. The method aims to help investors and entrepreneurs efficiently assess the potential of an early-stage startup that may not yet have significant revenue or assets to base a traditional valuation on.

Anjan Babu, Abraham Mathews, A. M. Chinmaya

Risk Factor Summation Method

Abstract

This chapter discusses the Risk Factor Summation Method (RFSM) of estimating the pre-money valuation of pre-revenue companies. RFSM considers a broader set of factors in determining pre-money valuation. This method is particularly useful for early-stage investors as it forces them to consider important exogenous factors.

The Ohio TechAngels describe the RFSM as a method that assesses various types of risks that a venture must manage to achieve a lucrative exit. These risks include management, stage of the business, legislation/political risk, manufacturing risk, sales and marketing risk, funding/capital raising risk, competition risk, technology risk, litigation risk, international risk, reputation risk, and potential lucrative exit. Each risk is assessed as either very positive, positive, neutral, negative, or very negative.

To determine the pre-money valuation of pre-revenue companies using the RFSM, the average pre-money valuation of pre-revenue companies in the region is adjusted positively by $250,000 for every +1 (+$500 K for a + 2) and negatively by $250,000 for every −1 (−$500 K for a − 2). For example, if the average pre-money valuation of pre-revenue companies in the region is $2.0 million and the assessment of the twelve factors results in five neutral assessments, five +1’s, one −1, and one −2 (a net of two +1’s), then $500,000 is added to the average valuation of $2.0 million, arriving at a $2.5 million pre-money valuation.

In conclusion, the Risk Factor Summation Method allows an analyst to arrive at Pre-Money valuation of an Early Stage Pre-Revenue Startup by thinking and adjusting for positive or negative eventualities that would have an impact in getting a lucrative exit for the investment.

Anjan Babu, Chinmaya Arikutaram, Abraham Mathews

Startup Valuation Based on the Real Options Approach

Abstract

Decisions taken by managers based on traditional approaches could be inflexible since they are based on straightforward criteria. This chapter proposes a general startup business valuation framework based on the Real Options (RO) approach which introduces the “Options Cycle for Startups” to assess different startup business scenarios. The RO is proposed not as a substitute of the DCF valuation approach, but as a complementary tool for the decision-making process. Even though market conditions may get worse, the RO approach shows that there is always a Time Value in any business decision-making. Results revealed that when DCF rejects a startup investment, the RO suggests that there is a chance to exercise the initial investment at the expiration of each stage of the startup cycle.

Jesus Cuauhtemoc Tellez, Aqila Rafiuddin

Startup Valuation with Data Envelopment Analysis

Abstract

Startup valuation has difficulties due to the facts that these companies have a very short history, limited estimation possibilities for the future of the company, negative cash flows of the company and difficulties to find comparable companies. These difficulties can be partially overcome by developing various assumptions.

Firm valuation method with Data Envelopment Analysis (DEA), where valuation tests have been performed for mature firms in the literature and it has been seen that quite satisfactory results are obtained, can also be used in the valuation of startup firms if the input and output data to be used in the analysis can be estimated with various assumptions.

In this study, first of all, DEA and the methodology of valuation with DEA are explained, then the value range of a hypothetical startup firm, as well as its maximum value, are estimated by analyzing it with real comparable firm data. As with other valuation methods, the realistic assumptions used in startup valuation with DEA will increase the success of the valuation. In this framework, it is an important requirement to select the most appropriate input-output mix in the startup valuation with DEA and to realistically estimate the selected input-output mix for the startup to be valued.

Yusuf Ozan Üzgün

Titel: A Practical Guide for Startup Valuation
herausgegeben von: Sinem Derindere Köseoğlu
Verlag: Springer Nature Switzerland
Electronic ISBN: 978-3-031-35291-1
Print ISBN: 978-3-031-35290-4
DOI: https://doi.org/10.1007/978-3-031-35291-1