The term “valuation” often arises in discussions about startups, such as when a certain startup achieves unicorn or decacorn status, or when it secures funding. However, not many people fully comprehend the true meaning of this term.
Understanding startup valuation and how to calculate it is crucial, especially for those aspiring to enter the startup world. It enables startup owners, founders, and investors to determine the appropriate value for funding. For owners and founders, knowing how to calculate startup valuation also facilitates negotiations with investors for funding. Since the valuation changes as the startup evolves, it is essential to calculate it not only during the early stages but also when planning business expansion.
So, how do you calculate the valuation of a startup company? Let’s delve into the complete explanation below!
Also read: 9 Type of Startups in Indonesia
What is Startup Valuation?
startup valuation
Before learning how to calculate the valuation of a startup company, it is essential to grasp its meaning first. In simple terms, valuation refers to the economic value of a business unit. Therefore, startup valuation pertains to the economic value of a company with market potential and competitiveness. This valuation is a critical factor when considering investments in the startup’s future development.
Startup owners or founders should calculate the valuation of their businesses because it determines the selling price of the startup when acquired or merged with another company. There are two types of valuation: pre-money valuation and post-money valuation. Pre-money valuation represents the economic value of a business unit before receiving investment, while post-money valuation represents the value after obtaining the investment. The post-money valuation is calculated by adding the pre-money valuation to the total investment.
Also read: 8 Key Differences Between Startups and MSMEs You Need to Know
Basics of Startup Valuation
After understanding the concept of startup valuation, it is equally important to grasp the basics of its calculation. Profit is a significant indicator when calculating startup valuation, but many startups do not generate profits during their initial establishment and development stages. As a result, adjustments are often made to the calculation of startup valuation.
Several factors need to be considered when conventionally calculating business valuation, including the market cap (the company’s value on the stock exchange), the value of other types of shares owned by the company, its debt, and its cash. The formula for this calculation is as follows:
Valuation = (stock value + debt) – cash
In cases where the startup has not achieved profits, attention is usually directed towards other aspects, such as transaction amounts, number of users, technological innovation, team quality, and competitors.
Also read: Early Startup Funding Stages: Explained From Seed to IPO
Methods and Ways to Calculate Startup Valuation
startup valuation
As mentioned earlier, the formula above is not the only benchmark or method to calculate startup valuation. Various methods are available, including:
Cost-to-duplicate method
This method calculates the valuation of startups by duplicating similar businesses. Investors can avoid spending more than what they intend to duplicate. The costs are based on verified expenditure histories, such as research, patent, and prototype development costs. However, this method may not accurately predict the potential return on investment, as intangible assets like brand value cannot be fully considered.
Also read: What is Pivot Strategy and When a Startup Needs to Use It
Berkus method
A widely used method for calculating startup valuation, the Berkus method is based on the US dollar (USD) value. It assesses several indicators that can increase the startup’s valuation, with each indicator contributing up to USD 500,000. The indicators include an interesting startup idea, a low-risk prototype, a high-quality management team, a relationship strategy with minimal market risks, and the absence of production risks that could disrupt sales. This method focuses on risk reduction and allows investors to evaluate profit predictions from their investment.
Scorecard method
This method uses percentages to calculate startup valuation and compares the startup with others in the same industry based on average pre-money value. Various elements are assessed in the scorecard method, including the strength of team management, products and technology, competitive environment, marketing/sales platforms/partnerships, the need for additional investment, growth potential, and other relevant factors. The scorecard method offers flexibility and allows startups to add value to crucial assets.
Also read: The Difference Between CEO and Director in A Startup
Venture capital method
Venture capital method is quite popular for calculating startup valuation and focuses on the return on investment (ROI).
The formula for ROI is as follows: ROI = terminal value (or harvest) : post-money valuation
This method considers the terminal value of a startup and its predicted ROI. For example, if a startup has a terminal value of USD 3 million with a predicted ROI of 10 times, an investment of USD 100,000 is required to achieve this result. Using the formula, the startup’s valuation before and after investment can be determined.
Also read: Iterative Process: Definition and Its Importance for Startups
Comparable transaction method
This method involves comparing various metrics, such as Gross Merchandise Value (GMV), total revenue, recurring monthly revenue, and the number of weekly active users for mobile applications. The startup’s valuation is compared with that of other startups based on data provided by the media. If the startup being compared to is listed on the stock exchange, its market cap will also be considered.
In conclusion, there are several ways and methods to calculate startup valuation, depending on the elements or factors that need to be included in the calculation. Each method offers a unique perspective on a startup’s value, helping investors and founders make informed decisions.
