How much is your startup worth? There are several startup evaluation criteria. We recommend three.
Do you need financing? Have you already decided that you are going to bring new shareholders into your startup? Perfect, but now you’re wondering: how much is my company worth? You must learn to value your startup. We have already talked here about some subjective criteria that you can follow, but today we are going to try to apply some objectivity, which will surely be highly valued by your potential investors.
In this sense, there are several startup evaluation criteria, but we are going to recommend three, depending on the state of your company:
1) Seed Phase: Scorecard Method
The Scorecard Method, devised by investor Bill Payne, tries to put a little reasoning to the most difficult phase for the valuation of startups. According to him, in order to set a price we have to make the following weighting:
- Equipment: 30%
- Market: 25%
- Product: 15%
- Environment and competition: 10%
- Traction: 10%
- Need for added financing: 5%
- Other factors: 5%
If you want to know more about this method, learn more about it here.
2) Billing phase: Run Rate method
If you are already invoicing, this method starts by calculating the net return of your startup. Once calculated, you should multiply it by the number of years that, in your opinion, the investment, sale, IPO or exit that you want to take into account will last. Usually, the multiple is usually 8, but that aspect should be discussed with your potential investors.
So, if your startup has a return of €10,000 per month, your annual return will be €120,000, so your valuation could be around €960,000, approximately.
3) Expansion Phase: Discounted Cash Flow (DCF) Method
By far, the most complex method of all, although according to the size and trajectory of your startup. The Discounted Cash Flow (DCF) method is based on a long list of objective parameters (turnover, profits, market size, competition, cash on hand, etc.) to establish a valuation by means of an equation.
Have you been scared by the complexity of the calculation method? It’s normal, but don’t worry: if your company is in a phase like this, it means that things are going well and that, at the very least, you can pay an expert to do the math for you. It is probably an expense that you should not avoid: any disbursement that benefits your startup will be significant.
You can further explore the Discounted Cash Flow method here.
