We all know how important it is to value a startup before investing in just an idea. Even if you are not investing and just want to know the methods of valuation for start-ups you can keep reading this blog.

There are several methods that analysts use to value a startup. The valuation of a startup tells about the conditions of the start-up and gives insights into it. This helps in figuring out whether it is a good investment or not.

To know the actual value of your startup there are many key points to consider, like the model of business, the idea, assets, revenues, and mainly the finances. It has become easier to evaluate all the financing since most of the new start-ups are using cap table software.

But if you are just starting with a new idea without any capital as an entrepreneur and looking for investors then there is a different method of valuation. Because in this case, you don't have any kind of record of your startup. In this case, your convincing power, your idea, and the investors decide whether your startup is a hero or a zero.

But don't worry! That is not it. There are proven methods that you can use for startup valuation. In this blog, we will discuss them briefly, and hopefully, by the end of this blog, you'll be able to know your startup's worth!

1. The Famous Berkus Way

For people who are familiar with the valuation business know what the Berkus way is. It was introduced by Dave Berkus and for many people, it had been helpful. In this method, Berkus wrote down these 5 key points that decide the success of a startup:

• The Idea
• The Prototype of the Product/Service
• The Managing Team
• Sales
• Strategic Relationship

After writing these key points about the startup the, Berkus method tells you to put an x amount of dollars in front of all the points. For example, if you add $300,000 after every point, the total valuation would be 1.5 million dollars.

In case the startup is in its early stages and is pre-revenue then the valuation would be 1.2 million dollars. This method is good for valuing a startup but it also has some limitations. It is because there are other things as well that are needed to be added. For the initial stage of a startup, you can use this method.

2. The Cost-to-Duplicate Method

The next method to determine startup valuations is the cost-to-duplicate method. In this method, only the tangible assets of your business are taken into account. This includes your product, the patent, and all the physical assets that are related to it.

So all the other things are not considered. Your brand name is not taken into consideration to value your startup and also the goodwill of your startup.
This method is efficient for only new startup’s.

It is because this method can not determine the actual value of a startup that has a brand name and goodwill. But still, it can be useful and people use this method for startup valuation.

3. Valuation of the Future of the Startup

Another way to value a startup is to bet on its future. In this method, the value of the startup is predicted depending on its current position. The value at the moment might not be very good but if the product is strong and the investors believe in its vision then a future valuation could be given to the startup.

A complete analysis of the startup is done in this case. Including all the sales projections for the upcoming years and the revenue projection.

4. The Comparing Method

The comparing method is probably the easiest way to determine startup valuations. In this method, the startup is compared to a similar startup that is established and has the same business model and product. So you have to find a business that is the same as yours. After that, you will compare your startup with it and value your startup accordingly.

5. Taking into Accounts All the Risks

We all know that there is some level of uncertainty in every business. The risk could be high or low, but in the end, there is a risk. So in this startup valuation method, all the risks related to a startup are taken into account, and then the valuation is done.

The first that you need to do is to do a basic valuation of the startup. You can use the Berkus method for example. After that, you need to make a list of the risks that your startup has. It might be a production risk, capital risk, political, or any other kind of risk. Once you know all the risks, deduct an estimated value for the number of risks that the business has.

Conclusion

As an entrepreneur, you should know how to value your startup before putting it in front of investors. In this blog, we have discussed 5 methods for startup valuations. You can read them to get the right value for your startup.