The valuation of startup companies is fundamental for evaluating potential investments and acquisitions.
You should already know that partnering with startups is an excellent alternative for companies that want a new gas for their innovation policies .
Promising, exciting and with a lot of energy to offer, these initiatives represent a great opportunity not yet explored by the market.
However, with so many options available, it is difficult to know which project best suits the specific needs of each company.
A good way to get a more concrete idea about this subject is through a well-done valuation process.
But how to evaluate companies that do not even have a concrete financial history? That’s what we’re going to talk about today.
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What is “valuation”?
In summary, valuation is the process of estimating the current value of an asset, company or investment.
This is a technique used by financial analysts, investors and companies to determine the fair price of an asset based on several variables.
Among these factors are items such as:
- cash flows;
- liquid assets;
- projected growth;
- risks involved;
- among other relevant indicators.
The purpose of valuation is to help in making decisions about buying, selling or holding an asset, investment or company.
Such a process is critical in many financial contexts, including mergers and acquisitions, equity valuation, corporate finance, portfolio management and general investing.
When we talk about startups , this process gains some particularities. Because we are talking about projects that, in general, are not yet consolidated in the market.
Therefore, the valuation of startup companies requires some methods and special care. We’ll talk more about that later in this article.
How to do the valuation of startup companies?
Valuation of startups can be more challenging than that of established companies , as these projects often do not yet have significant revenue or sufficient financial history for a detailed analysis.
However, there are some approaches that can be used to evaluate startups. Let’s get to know some of these options in the paragraphs below.
1. Comparative analysis
First, it is possible to compare the startup with other similar companies that have already been evaluated.
This might involve looking for companies with similar business models or similar backgrounds and looking at past valuations to determine a fair price for the startup.
This analysis is interesting for developing an initial idea of the value of this startup, providing a reliable average for comparison with similar companies.
Therefore, comparative analysis can be a good starting point for more sophisticated and in-depth research.
2. Valuation based on discounted cash flow (DCF)
This approach involves projecting the startup’s future cash flows and discounting these assets to present value.
This approach is useful for startups that already have some financial history and projected monetary data.
Despite being a more sophisticated valuation model, this method can offer more control and predictability for future investors or contractors of these projects.
3. Valuation based on multiples
In this valuation it is also possible to use financial multiples , for example revenue, profit or active users, to value the startup.
These multiples can be compared with similar companies, or in the same industry, to determine a fair price.
Such a valuation model allows a good understanding of how the activities of the startup being evaluated are going, allowing future investors and contractors to get to know these projects in more depth.
4. Assessment based on team value
For early-stage startups, team value can be an important factor in that valuation.
This involves analyzing the team’s experience, skills and track record and determining a fair value based on that. It is also worth thinking about the real potential of the members of this initiative.
Keeping an eye on promising young professionals can be a good alternative. Despite lacking experience and professional structure, these beginner entrepreneurs enter with a great desire to consolidate their ideas.
Identifying these talents and incorporating them into a company that seeks innovation can be the perfect combination for success in this search for creative solutions within organizations.
It is worth noting that it is important to remember that evaluating startups can be more subjective than evaluating established companies, as many startups are still in the growth and development phase.
Therefore, you need to consider multiple approaches and data sources when valuing a startup, and always seek professional advice before making significant investment decisions.
How to choose a suitable valuation method for a startup?
Choosing the right valuation method for a startup can depend on several factors.
Here are some considerations to keep in mind when choosing the model that best suits your current situation.
Startup development stage
One of the important elements to be taken into account is the maturity level of the project in question.
Early-stage startups may not have significant financial history or financial projections.
In this case, it may be necessary to use a valuation approach based on the value of the team or compared to other similar startups.
That is, when it comes to valuing startup companies at an early stage, items 1 and 4 on this list are preferred.
Different industries may have different valuation approaches that are more appropriate.
For example, for technology startups, it may be more appropriate to use financial multiples based on users or revenue, while for biotech startups, it may be more appropriate to use the value of intangible assets such as patents .
At the end of the day, it is necessary to carry out a thorough market research to find out how the market in which this promising project wants to enter is doing.
The startup’s business model can also influence the valuation method . For example, for startups with recurring revenue, it may be more appropriate to use a discounted cash flow approach.
While for startups with an advertising-based business model , it may be more appropriate to use multiples based on pageviews.
Availability of financial data
The more financial data available, the more accurate an approach based on discounted cash flow can be.
However, if the startup does not yet have sufficient financial history, it may be necessary to use a comparative or multiples-based approach.
The trend is that the more data generated, the more information will be available to future investors.
How does the evaluation process help open innovation projects?
When we talk about startups that work with open innovation , the so-called “open startups”, the valuation of companies is even more necessary, especially when there is investment interest involved, for example, through corporate venture capital (CVC), or even Fusions and acquisitions.
After all, this can be one of the fundamental parameters for investors and contractors to choose which project best fits their current needs.
The valuation process can help assess the financial return potential of such a project, allowing companies to prioritize projects with the highest potential return on investment.
Additionally, this informed assessment method can help negotiate business agreements and partnerships.
During the open innovation process, there can be multiple parties involved in a project, including startups, companies and investors.
A sound financial assessment can help facilitate the negotiation of honest and fair agreements for all parties involved. In addition, this practice facilitates risk management.
The valuation process can help identify potential financial risks associated with an open innovation project , allowing companies to take precautionary measures to manage these risks and minimize the impact of unforeseen events.
With a clear financial assessment, companies can make informed decisions about how much to invest in an open innovation project, which can help ensure that the investment is properly scaled.
In summary, the valuation model can help open innovation projects to be more successful, providing valuable financial information that can help guide investment decisions and ensure the financial sustainability of the project.
Where to find validated open innovation projects?
Everything we talk about throughout this article is part of a long and complex process of market research and analysis.
The valuation of startup companies is something that demands a lot of time and knowledge . In today’s dynamic and competitive market, these are very valuable resources.
Have you ever thought if there was a place with all the best open startups in the country, duly evaluated and validated by the corporate market itself?