Startup Valuation: Methods, Investor Insights & Key Factors

How can you calculate cash flow using a financial statement? Being able to calculate cash flow is very important when determining the value of a company. So far, on the previous pages, we have continuously discussed cash flow, assuming it as a given. However, this is not realistic in practice. Those who value a company must investigate what the most likely cash flow will be for the next five to ten years. But what is cash flow, and how can you calculate cash flow?

This is the inspiring success story of Bill Gates, the technological pioneer, and philanthropic giant who co-founded Microsoft Corporation, shaping the landscape of personal computing and leaving an indelible mark on the world. There are numerous webpages about Bill Gates. Within the context of this site, we will focus on his remarkable strategy to sell an operating system to IBM while retaining the right to sell the software outside the IBM boundaries

If you want to buy, sell, or invest in a company, it is essential to determine the company's value. There are various methods to calculate a company's value, some of which are faster and simpler than others. On this page, we will first focus on five quick valuation methods based on the following financial variables from the annual report: annual revenue, intrinsic value, net profit, EBITDA, and EBIT.

The cost method is a cost-based method for the valuation of an invention in a startup. This is also a simple way for the valuation of a business and is often used when there is no financial history available for the startup.

What is the value of money that you possess today in the future? An investor who decides to invest their money in your startup with a good idea or invention instead of putting it in a savings account at the bank believes that they can eventually earn more money. To determine the valuation of an invention or business idea and substantiate their investment decisions, professional investors use various analytical methods. An important concept in this regard is the Discount Rate.

What is the DCF method? In order to be able to discuss the more advanced methods for valuing a company, we first need to introduce the DCF method (Discounted Cash Flow method). The DCF method is a commonly used way to determine the value of a startup or a larger company, looking at the cash flows in the future.

With the Capital Asset Pricing Model (CAPM), an investor determines how much compensation he/she wants to receive for the risk undertaken. CAPM is essentially an investment theory that tells you something about the required return you should aim to achieve to be compensated for the risk of investing in a startup or any business. According to the Capital Asset Pricing Model, this so-called required return is composed of a risk-free component and a premium determined by the risk inherent in the project or company.

The Net Present Value (NPV) is often used to determine whether it is worthwhile to invest in a startup company with an invention or a good idea. By calculating the Net Present Value, the current value of future cash flows is essentially determined, known as discounting. This allows us to determine whether added value can be created by making a certain investment now. In other words: does the investment yield sufficient returns? In the example given, the NPV formula used is built into most spreadsheet software and I will show you how to use it.

The concept of return is easy to understand. It simply represents the difference between what you initially had and what you have now, expressed as a percentage. For practical reasons, return is often associated with time, such as 20% per year or per month, and is applied in various fields ranging from finance to energy.

We show how to determine the value of your tech startup with the comparables analysis method. This method is based on the assumption that companies with similar characteristics should have similar ratios or multiples.

At the end of our series on startup valuation we will show you how shares are distributed within a startup, and how this is related to Goodwill and Business Valuation. This is a key aspect that must be thoroughly negotiated before an investor commits to any investment. To provide clarity, we'll also introduce two essential concepts: pre-money valuation and post-money valuation.

One of the more sophisticated startup valuation techniques is the Monte Carlo Simulation. We saw in the earlier pages that the assigned value of each input variable and/or key driver is actually a mean, or expected value (the best guess estimate), and even if the variance around the expected value of the variable is known, it is not taken into account in determining the value. Monte Carlo simulation provides a solution to this.