Startup valuation involves estimating the potential worth of a company, especially in its early stages, considering various factors like its financial health, market opportunity, and growth potential. Valuation is a key concept for startups, especially when it comes to fundraising. Two terms that often get tossed around during investment discussions are pre-money valuation and post-money valuation.
Let’s discuss this one by one.
- ๐ฃ๐ฟ๐ฒ-๐ ๐ผ๐ป๐ฒ๐ ๐ฉ๐ฎ๐น๐๐ฎ๐๐ถ๐ผ๐ป refers to the value of a company before receiving a new round of investment. It gives investors an idea of the current value of the company.
- ๐ฃ๐ผ๐๐-๐ ๐ผ๐ป๐ฒ๐ ๐ฉ๐ฎ๐น๐๐ฎ๐๐ถ๐ผ๐ป, on the other hand, refers to the value of the company after the investment or capital infusion. It takes into account the new capital raised during the funding round.
๐๐ฒ๐โ๐ ๐๐ป๐ฑ๐ฒ๐ฟ๐๐๐ฎ๐ป๐ฑ ๐๐ต๐ถ๐ ๐๐ถ๐๐ต ๐ฎ๐ป ๐ฒ๐ ๐ฎ๐บ๐ฝ๐น๐ฒ:
Mr. X wants to invest INR 25,00,000/- in a StartUp, while โStartup Aโ wants to raise money. Both agree that the company is worth INR 1,00,00,000/-. Now, the ownership percentage will depend on whether the INR 1,00,00,000/- is pre-money valuation or post money valuation.
๐๐ ๐ฎ๐บ๐ฝ๐น๐ฒ ๐ญ:ย If INR 1,00,00,000 valuation is pre-money, then post-money valuation will be INR 1,25,00,000 (INR 1,00,00,000 + INR 25,00,000). Whereas the stake of Mr. X will be 20% (INR 25,00,000/1,25,00,000*100).
๐๐ ๐ฎ๐บ๐ฝ๐น๐ฒ ๐ฎ:ย If INR 1,00,00,000 valuation is post money, then pre-money will be INR 75,00,000 (INR 1,00,00,000 – INR 25,00,000). Whereas the stake of Mr. X will be 25% (INR 25,00,000/1,00,00,000*100).
In addition to the above, there are some of the methods of valuation which are used for valuation of Startups:
1. Book value method
The book value method of valuation calculates the company’s worth by subtracting total liabilities from total assets, as shown on the balance sheet.ย This method provides a view of the company’s Net Asset Value, representing what the company would be worth if liquidated.ย It’s a simple and widely used valuation technique.
2. Discounted Cash Flow method
This methodย estimate the present value of the predicted future cash flows of the company by discounting them by an appropriate rate.
Usually, the Weighted Average Cost of Capital (WACC) is used as the discount rate to arrive at the present value of the cash flows. The end purpose of such analysis is to estimate the amount of money an investor would receive from an investment.
3.Comparable transactions method
This method values a company by comparing key metrics like revenue and price/earnings ratios to other similar companies. It also uses past transactions of similar companies to estimate the value of a target company.
4. Berkus Method
The Berkus Method is perfect when your startups doesnโt have revenue yet. Instead of focusing on financials, it gives value to what really matters early on, your idea, team, prototype, product progress, and market potential.
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