startup valuation.pdf

1. Cost to duplicate approach How much it would cost to build another company just like it from scratch. This approach looks at the expenses the company has already incurred to develop its product or service and purchase physical assets. Doesn't consider the company's future potential or intangib...

1. Cost to duplicate approach How much it would cost to build another company just like it from scratch. This approach looks at the expenses the company has already incurred to develop its product or service and purchase physical assets. Doesn't consider the company's future potential or intangible assets. This approach is often seen as a starting point for valuing startups, since it is fairly objective. After all, it is based on verifiable, historic expense records. 2. Market approach Considers the acquisition costs of similar companies in the recent past. Investors like this approach, as it gives them a pretty good indication of what the market is willing to pay for a company. 3. Discounted cash flow technique DCF involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. A higher discount rate is typically applied to startups, as there is a high risk that the company will inevitably fail to generate sustainable cash flows. 4. Valuation by stage Often used by angel investors and venture capitalist firms to come up with a rough-and-ready range of company value. The further the company has progressed along the development pathway, the lower the company's risk and the higher its value (Business Plan, strong management team, final productor technology Prototype, strategic alliances or partners, clear signs of revenue growth and obvious pathway to profitability) 5. The bottom line Net income of a company for a certain period, recorded on the bottom line of the net income financial statement. The bottom line is calculated by subtracting expenses from gross sales or revenues, and it shows how profitable the business was during a specific accounting period It is extremely hard to determine the accurate value of a company while it is in its infancy stages as its success or failure remains uncertain.