In the startup arena, there could be some stellar business ideas that may fail to generate revenues. Valuing startups without any revenue in economic terms is a tricky affair. Valuation of startups is important to judge the company’s capability to use additional capital required to grow and meet other business objectives. The answer to the question on how to value a startup company with no revenue is largely determined on the basis of its product, business model, assets, gross addressable market, market opportunity, competitors’ performance, team’s expertise and goodwill. Besides that, it does involve a bit of an instinctive approach which remains largely unexplained by some seasoned investors.
However, the existence of the number game is dominant in the startup valuation process. Angel Investors and Venture Capitalist firms apply various formulas to establish the pre-money value of a business and its worth before making any investment. Coffeemug.ai could help you to understand how to evaluate a startup. For the startup fraternity, Coffeemug.ai is an ideal platform to connect you with the right people for good investment opportunities and raising money for your startup.
There are some commonly used methods for valuing startups that can be applied to value a startup and gear up for the next level of fundraising negotiations.
How to value a startup?
1. Berkus Method: Created by venture capitalist Dave Berkus, the Berkus method is an uncomplicated tool that helps in the valuation of pre-revenue startups that are yet to sell their products at a larger scale. It’s a very simple formula that adds up dollar amounts to five key metrics found in early-stage startups. The five key success metrics considered for startup valuation under the Berkus method include startup idea, prototype, quality management team, strategic relationships and product sales.
Berkus method caps pre-revenue valuation at $2 million and the post-revenue valuation is capped at $2.5 million. However, this method does not consider other market factors.
2. Comparable Transactions Method: The Comparable transactions method is yet another popular approach for startup valuation. This approach takes cognizance of the value at which other startups in the same business domain, following the same model, were acquired for. In other words, startups and investors eye on those companies with a similar business model to the company being targeted. If there are more comparable transaction data available for analysis, then its easier to derive a fair valuation.
3. Scorecard Valuation Method: The scorecard valuation method considers comparable startups from the same stage, business domain and geography as the base value. After that, the value of the startup under consideration is determined on the basis of
- Product
- Market opportunity
- Management Strength
- Business environment
- Sales and Marketing
- Additional capital needs
- Other factors
4. Cost-to-Duplicate Approach: As the name suggests, the Cost-to-Duplicate approach is adopted when the startup owner(s) are considering to recreate their startup elsewhere and would want to calculate the costs involved in this process. This approach does not consider any intangible assets, namely, the company’s brand or goodwill.
As part of this approach, a fair estimated market value of the physical assets of the business is added up. Other costs pertaining to Research and Development, patents, a product prototype is also included while making the final valuation. However, the cost to duplicate the approach does not cover the full value of the startup, especially if it’s making money. It also ignores key elements like the company’s customer engagement.
5. Risk Factor Summation Method: The Risk Factor Summation method of valuation considers 12 risk factors and then adds or deducts the monetary value of the startup on a 5-point scale from very high risk to very low risk for each of them.
The 12 common risk categories are mentioned below:
- Management
- Stage of the business
- Political
- Manufacturing
- Sales and Marketing
- Funding
- Competition
- Technology
- Litigation
- International
- Reputation
- Lucrative Exit
However, the difficult part about the risk factor summation method is one needs to find an objective point of reference to calculate each component. Therefore, it is easier to start valuing your startup with some comparable methods.
6. Discounted Cash Flow Method: In order to value your startup using the Discounted Cash Flow method, the startup owners need to seek help and guidance from a market analyst or an investor. Under this approach, the future cash flows are predicted and then a discount rate is applied to it.
7. Venture Capital Method: Venture Capital is considered to be the aptest method to value a startup without revenue. It was introduced by Harvard Business School Professor Bill Sahlman in 1987. The VC method follows a 2-step process. First, the terminal value of the startup in the harvest year is calculated and the second step entails tracking backwards with the expected ROI and investment to figure out the pre-money valuation.
8. First Chicago Method: Based on the startup’s projected cash flow, the First Chicago method establishes the future value of a startup. This approach largely expands on the Discounted cash flow approach. It balances the startup’s projections by moderating the best, worst and average case financial projections.
9. Book Value method: The Book Value method is a simpler version of the Cost to Duplicate model as it helps establish an asset-based valuation. Also known as the Asset-based valuation method, the book value method calculates the net worth of a startup.
How can Coffeemug.ai help you in startup valuation?
If you are curious about how to value a startup with no revenue, Coffeemug.ai can help you to connect with seasoned investors, investment bankers and market analysts; who can help you assess the right method for calculating your startup’s worth, which will help you negotiate better to back a fair deal. The curated network of the platform ensures that you get access to the right set of people who could help in your startup journey.
FAQs
Q. How are early-stage startups valued?
A. Comps are the simplest approach to value an early-stage company, but because each business is unique, accuracy is limited.
Q. What are the 5 methods of valuation?
A. Top 5 valuation methods for start-up are
Asset valuation
Relative valuation
Historical earnings valuation
Future maintainable earnings valuation
Discount cash flow valuation
Q. Can you value a company without revenue?
A. Yes, you can value a company without revenue but it poses unique problems. Experts may not be able to apply typical valuation methodologies like the capitalization of earnings or others.
Q. How do you value a startup without revenue?
A. There are a few standard approaches to determining how much a start-up is worth without revenue
- Berkus method
- Scorecard method
- Venture capital method
- First Chicago method
- Risk factor method
