How To Do A Home Appraisal Using Different Methods
Home Appraisal–Startup reviews provide insight into whether a company can grow with new capital, meet customer and investor expectations and take the next step. Today, unicorns (companies valued at $1 billion or more) are valued in the hundreds. Decacorns, $10 billion startups, and even more than $100 billion Hectocorns.
While impressive, these calculations are not as objective as one might think. For example, a startup evaluation can consider your team’s experience, product, assets, business model, total addressable market, competitor performance, market opportunity, company value, etc.
If you have actual income, you can use complex financial numbers as a starting point. But in the context of fundraising, your business is ultimately worth what you and your investors agree it is. And most angel investors and venture capitalists use various formulas to determine a company’s pre-monetary value or its pre-investment value.
It’s fair to say that evaluating a startup is both an art and a science. This article will go over eight techniques you can use to assess your startup and prepare for future fundraising conversations. Whether you are in the pre-seed phase or just writing stock options to your employees, this will help you understand the different methods of evaluating startups.
Common Startup Evaluation Methods for Home Appraisal
Calculating the value always takes a little guesswork, but there are some helpful documents you can prepare. Annual financial statements such as a balance sheet are essential. Be prepared to assess your team’s skills and experience and identify strengths and weaknesses.
You can use databases like AngelList or Crunchbase to directly compare your valuation to similar companies, or you can consult online indices and public business reports.
Naturally, the ratings differ between locations, sectors and years. So, for example, a real estate tech startup founded in Silicon Valley in 2009 should not be the criteria for a prop-tech startup in Boston in 2020. And a B2B company can have radically different inputs than a B2C company.
1. The Berkus Method Is One Of The Home Appraisal
Venture capitalist Dave Berkus developed the Berkus Method to find valuations specific to low-revenue startups; H. Companies that have not yet sold their products on a large scale. The idea is to map dollar amounts to five critical metrics of early-stage startup success.
The simple formula helps founders and investors avoid erroneous valuations based on projected earnings, which few startups encounter in the expected period.
This method caps pre-earnings valuations at $2 million and post-earnings valuations at $2.5 million. Although it doesn’t consider other market factors, the limited scope is helpful for companies looking for a simple tool.
2. Comparable Transactions Method Is One Of The Home Appraisal
The comparable transactions method is one of the most popular valuation techniques for startups because it is based on precedent. They answer the question, “How much were startups like mine bought for?”
For example, imagine that Rapid, a fictional shipping startup, was acquired for $24 million. Its mobile app and website have 700,000 users; It costs about $34 per user.
Your delivery startup has 120,000 users. It gives his company a valuation of around $4 million.
You can also find earnings multiples for similar companies in your industry. For example, SaaS companies can expect to make 5x to 7x last year’s net income in your market.
It would help to consider ratios or multiples for anything drastically different between your two companies with any comparison model. For example, suppose another SaaS company has proprietary technology, and you don’t. In our example above, you can use the multiplier at the lower end of the range, e.g. B. 5x (or less).The method using here is almost used by all market strategies
3. Board Scoring Method Is One Of The Home Appraisal
The control panel method is another option for businesses with no revenue. It also works by comparing your startup to others already funded but with additional criteria.
First, determine the average pre-money valuation of comparable companies. Below you can see how your company scores on the following attributes.
- Team Strength: 0-30%
- Opportunity Size: 0-25%
- Product or service: 0-15%
- Competitive environment: 0-10%
- Marketing, distribution channels and associations: 0-10%
- Need for additional investments: 0-5%
- Other: 0-5%
Next, you’ll assign each quality a comparison percentage. Essentially, for any rate, you can be on par (100%), below average (100%) compared to your competitors. For example, it gives its e-commerce team a 150% score for being fully and extensively trained and having experienced developers and vendors, some from competing companies. You would multiply 30% by 150% to get a factor of 0.45.
Do this for each shoe quality and determine the sum of all factors. Finally, multiply this sum by the average rating of your job area to get your pre-billing rating. Learn exactly how to assign percentages and weigh each factor in this explanation from Bill Payne, the creator of the method.
4. Approaching the cost of duplication
The key to this method is in the name. First, calculate how much it would cost to rebuild your startup elsewhere, minus intangible assets like your brand or customer base.
Add up the fair market value of your assets. It may also include research and development costs, product prototype costs, patent costs, etc.
A significant disadvantage is that this method does not capture the total value, especially if it is generating revenue. When calculating your startup’s score, you may need to ignore relevant elements like your customer engagement.
5. Sum of risk factors method
It is a more comprehensive way of evaluating your startup. Start with an initial assessment using one of the other methods mentioned here. Then increase or decrease that monetary value to multiples of $250,000 depending on the risks affecting your business.
Low-risk items receive a double plus rating (++), which means you add $500,000 to your rating. High-risk items are rated twice as good (–), and you deduct $500,000.
For example, if your online custom clothing store has a low but low risk of competition, you can give it a positive review but only add $250,000.
The 12 common risk categories are:
- corporate level
- Legislation/Political Risk
- manufacturing risk
- Trading and Marketing Risk
- Financing/funding risk
- competitive risk
- Technological Risk
- litigation risk
- international risk
- reputational risk
- Potentially lucrative exit
The tricky part of this method is finding an objective benchmark to measure each component. It can be helpful to start with comparable methods such as the scorecard method or the similar transaction approach.
6. Discounted cash flow method
Companies can also be valued using the discounted cash flow (DCF) method. You may need to work closely with a market analyst or investor to use this method.
It takes your projected future cash flows and then applies a discount rate or expected return on investment (ROI). In general, the higher the discount rate, the riskier the investment and the better its growth rate should be.
The underlying idea is that investing in startups is a high-risk decision compared to investing in companies that are already up and running and generating consistent income.
You can also consider the first Chicago method, extending the DCF method. Consider three scenarios: the other two are one where the startup performs poorly based on forecasts and one where it serves even better than expected, giving it three different company ratings.