In this articles we will share the Startup Valuation Method that is mostly used by Venture Capitalist and Angel Investors for valuing Startups. Startups are valued with different methods and approaches, this all depends on products, users, technology and revenue models.
Here Investor invests to earn return of their equity and they risk high on startups because early stage startups have no business experience, no established brand of their products and services, No Human Resources, illiquid Investments etc. The Future of Startups are uncertain, so valuing a startup can be little bit tricky.
Here we will discuss startup valuation at pre-revenue stage or revenue generation just commenced and gradually being scaled up.
Minimum Requirements for Startup Valuation and Stake Diversion – Procedure
Expected Investment by Venture Capitalist or Angel Investor :
For Example are you an startup Founder and have recently get connected with Venture Capitalist or Angel Investor, He wants to I invest Rs. 100 lakhs in your startup, so How much Company Stake are you willing to divert to get Rs. 100 lakh into your business. We will find this out at later stage.
Expected Profits by Startup Company will earn
It is Important to know that what products or services startup entity have , how much it will earn in next year. We need to do some maths and got that company will earn profits of Rs. 300 Lakhs on fifth year.
Expected Return on Equity Investor expects from Startup entity
There is certain percentage return that Investor expects to earn from its Investment , say Investor wants to earn 20% return on Investment per year, 25% return on Investment per year.
The required Future Value of Investment = 100*(1.20) for 5th Year
if you calculate the Future Value this Comes out at = 248.83 at 20% and 305.18 at 25%
Valuation of Company at this time
5th Year Net Profit * PE Multiple
300*8 = 2400 Lakhs
How much Company Stake to be diverted
248.83/2400*100 = 10.36% stake