Valuing startup companies raising their first rounds of capital involves limited sets of data to work making the process more difficult than companies that have been in existance for years. All valuations become part of a company's public history, as well as a reflection of its founders' and investors' view of its future. Valuations during the early years of a company are commonly performed rather informally which may cause unforeseen problems and heartache, when least expected or desired.
As we pioneer mission-critical data aggregation and analyses for our client companies and the venture funding community, we believe we must also offer them access to services that provide realistic and insightful valuations.
We work with firms to offer our community audit and valuation expertise.
Sources of Data
- CB Insights
- Aggregated data from startups raising online
- Adobe Digital Index
- Google Insights
Apply these sources of data to forward looking revenue for valuation
An informal, but effective, way of keeping tabs on market position and future prospects is benchmarking it against peers and against the market through comparable analysis.
FundWisdom provides the following benchmarking services:
Instant, real-time, 24x7 access to the entire portfolio of investments in our platform.
Search capabilities to narrow the field by industry, geography, or other criteria.
Email alerts to find out about new comparable companies that have come online.
Net Present Value (NPV)
One can value a business by determing a value for the stream of cash it generates. Net Present value or discounted cash-flow analysis looks at how much cash the business generates each year, projects it into the future and then calculates the worth of that cash flow stream "discounted" using a discount rate, typically a long-term Treasury bill interest rate. The difficulty with this lies with the need to estimate the earnings for the next several years. Many startup firms have little to no revenue. This also brings up the importance of a good set of books, or the accouting recordings and procedures.
Discounted Net Cash Flow (DCF) analysis is another method of estimating company value. This method has three steps: Forecasting future net income; calculating future net cash flows from forecasted net income; and discounting each year's forecasted net cash flows back to present value using an appropriate rate of return. The valuation is the sum of the discounted net cash flows. While many startups have little to no history and the future is uncertain, reasonably realistic forecasting can be achieved with some thought and care.
Valuations to Support Transactions
Before entertaining a funding offer or engage in other material transactions, it is important to have a realistic picture of value and a solid understanding of what actually drives that value. Knowledge is power. High quality valuation knowledge will put you in a better position to negotiate, or to move on.