Start-up companies or start-up businesses are newly established companies that have started to generate little revenue and profits or have not achieved any revenue or profits yet.
It may be just a new idea and a small business team or just intangible assets like a patent.
Funding rounds for startups:
• Self-funding • Seed-capital • Venture Capital, which may pass through several rounds • Company Public Launch – IPO – Initial Public Offering
At each stage of the financing stage, the emerging company needs to be re-valuated to determine the current value of the company and thus the new investor’s share of the company in return for the required financing. The difficulty in valuating startups is the fact that most of the time they have not yet started generating revenues and profits.
Or that the revenues and profits are very few and predicting the size of the coming revenues is very difficult. Most of the time the idea you are working on has not been proven yet.
Hence, traditional mature business valuation methods are not suitable for evaluating startups at all. In order to value the startups, several methods have been devised, one of which can be applied to the emerging company under evaluation.
Important Note: The process of evaluating any investment is not a simple or direct process, and therefore no single method or theory can be adopted to arrive at a logical or correct valuation of the investment. Especially with intangible assets – other factors that go into evaluation, such as team strength, perks, and team PR.
Methods for evaluating startups:
• Cost to duplicate • Market Multiple • Discounted Cash flow • Valuation By Stage
Cost to duplicate:
As indicated by the name of the method, by using this method the investor estimates the cost of establishing a project similar to the asset offered for investment again. And compare it with the required investment number. This method is suitable for evaluating the software application cost, real estate, and cars. but it does not give the correct value to the work team and the intangible assets, and it does not guarantee the same result as the emerging company subject to financing.
Market Multiple:
Using this method, the current investment is compared with similar investments that have been valued in recent times within similar market acquisitions. The same valuation method applied to recent acquisitions as the expected number of sales for five years, for example. This is the most common method.
Discounted Cash flow:
This method is similar to valuating mature companies, so the application of this method requires a deep understanding of the way the startup operates and an accurate forecast of future revenues and profits to calculate net income after deduction based on the appropriate discount rate. A relatively high discount rate should be applied when valuing emerging investments, given their high risks, compared to mature companies.
Valuation by Stage:
And here, each stage of the startup stages is valued at a certain value, down to the total amount as the value of the company. For example, the project idea is evaluated with a certain amount, the work team at a certain amount, as well as the ability of the idea to be realized, successful, and continuously growing.
An important rule: The financial valuation process requires a professional and certified team with long experience in the field of financial valuation. Therefore, it is advisable to verify the qualifications of the working team nominated to undertake the financial evaluation process for the investment or startup.
Accreditation by the International Valuation Standards Council the qualifications of the work team and their experience. Of course, the opinion of customers and customers about the service provided to them.
Do you need a financial Valuation service for emerging investments?
We at ACCYBER are certified by the International Valuation Standards Council You can view the link Our Members (ivsc.org) Our team has many years of experience in the field of financial management, accounting, and financial analysis, and holds international certificates in this field. We provided the financial evaluation service in the Middle East markets with efficiency and success.
Ghazi Al Mahaini
CMA-CFM
CEO OF ACCYBER