If you seek to understand how much your startup is worth, using a valuation calculator is undoubtedly worth considering. A valuation calculator helps entrepreneurs to know the precise value of startups to shape key decisions. Most startup calculators like Startup Falcon rely on four main methodologies to arrive at the value of startups: the Scorecard, Step Up, Checklist, and Risk Mitigation methods. Each of these approaches employs a unique approach to value calculation. For instance, the checklist method, for example, assigns a monetary value to five specific external factors based on particular risk elements.
Every factor marked “yes” adds a monetary amount to the startup’s value. Each checklist item has a maximum value, so your startup is compared to this to arrive at an accurate pre-money valuation amount. However, the four methods listed above are not the only ways to value startups, despite being the most popular. Here are some less popular but equally effective methods used to value startups.
Discounted Cash Flow Method
The discounted cash flow approach approximates how much cash flow your startup will generate in the long term. This method generates a value based on a wide range of detailed assumptions about your startup’s business model. Then, it calculates your revenue over a defined number of years. Admittedly, the discounted cash flow method isn’t the best approach since it relies on the analyst’s abilities and the discount rate used to factor in the startup’s high-risk factors. Therefore, many experts recommend combining it with other methods to ensure the value generated is as accurate as possible.
Much like the scorecard valuation method used by Startup Falcon, the comparables approach calculates your startup’s value by comparing it to similar companies. You simply find a company comparable to yours in terms of churn rates, MMR growth, and so on and use them to estimate your value. This method is perhaps the simplest of them all since it relies on fewer assumptions compared to other approaches like the discounted cash flow method. However, your estimation’s accuracy depends on how correct the market value of the peer company is. Although it isn’t known for its high accuracy, the comparables method is a great starting point to value your company in the very early stages.
Cost To Duplicate Method
This method examines how much it will cost to establish the exact startup from scratch to arrive at an accurate valuation. Specifically, it considers the costs of starting afresh in a new location or industry. The cost to duplicate method can help investors determine how sound their investment is very quickly. It is simply not a great investment if your company can be set up better or for less in another location. However, this calculation is very rough, as it doesn’t factor in tax laws in other locations, return on investment growth potential, and intangible assets like brand loyalty. Consequently, it isn’t uncommon for startups to be valued below their actual worth when the cost to duplicate method is used.