Valuing Startups – Why Startup Valuation Is Often Used When Purchasing Businesses

Startup Valuation

Startup valuation techniques are the means by which an entrepreneur can calculate the worth of their business during the early pre-profit stage of their life. There are many valuation techniques used to determine the value of a venture, but the three most popular are (a) the financial metrics used at the time of the purchase, (b) the intrinsic value of the assets sold, and (c) the cash flow of the company at the time of sale. Regardless of the method chosen, it is important that one selects a valuation method that is unbiased, transparent, and objective.

Financial Metrics Startup valuation is often used to determine the value of small, fast developing startups. These startups are usually the ones with less potential earnings and larger expenses; therefore, they have fewer marketable securities, and hence, a lower potential for accrual of venture capital. Startup valuation is based on the ability of a company’s products or services to attract buyers and generate revenue. In general, these valuations also consider the likelihood of returns, liquidity, control risk, potential growth rate, and business history.

Intrinsic Value A valuation of a startup is based on its intrinsic value. The reason why this form of valuation is referred to as “intrinsic” is because it derives its value from the business idea itself, not from the business operation. As was stated above, most pre-seed and seed stage startups have lower marketable securities compared to later-stage businesses. This is why the valuation is based on the business idea alone – not on the operations of the company.

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