Valuation For Start Up Businesses – New Model

FUNDING BUTTON LINK

NEW BLOG POST HEADER

Valuation Step Function For A StartUp Entity - Douglas E. Castle

 
 
Establishing a valuation for a startup business is not only a challenge, but it is (on a positive note) an opportunity to be endlessly creative depending upon projections and other variables. Having said this, valuation is the primary issue, aside from survivability of the underlying business, that concerns both the promoters and the prospective investors in the startup.
 
Sadly, most entrepreneurs are clueless about the issue of company valuation and the need to have some underlying theory to support it when a prospective investor inquires. The valuation model must be established by the company’s owners or promoters immediately, before solicitation or recruitment of investors begins — and, admittedly the process is somewhat arbitrary at its very starting point, but a model constructed on logic needs to be created.
 
Established companies value themselves (assuming that they are not publicly-traded) based upon several approaches, or upon an average of the of the results yielded by several approaches. These include 1) values of comparable companies in the same industry and of approximately the same revenue size or point of revenue growth; 2) net present value of several consecutive years of either historical cash flows or projected cash flows, with the latter used far less frequently than the former, in the the interest of conservatism; 3) the cost to replace the business at its current operating level; and d) the liquidation value of the business, where the fair market value of all the assets are reduced by the amount of all liabilities and either a fairly negotiated value or a distressed value (i.e., the fire sale) in an immediate cash sale at auction.
 
None of these approaches lends itself to valuing a brand new enterprise, so alternative, creative approaches have to be designed. The only solid variables to work with are 1) an initial starting point valuation for the first investor who comes in; 2) the timing of an investor’s capital contribution, which is the order (i.e., first-in versus last-in) of that contribution — the later the investment, the higher the company’s dynamic valuation, because the perception is that later adopters are more risk-averse and not as critical to the new entity’s very survival; and 3) the amount of the investment, on the assumption that a larger investment is more valuable to the company than a smaller one, so that it should be “appreciated more” in terms of a bargained-down valuation.
 
I would propose that a combination, or multivariate formula comprised of these three variables be applied to solving the valuation issue. This could either be done with a degree of arbitrariness and instinct, or it could be done with a multivariate type of formula.
 
By way of example, if each factor could be assigned a weight (represented as the inverse of a decimal fraction), perhaps a dynamic valuation formula for a new enterprise could look like this:
 
Dynamic Valuation = Preliminary Valuation x f(order, amount).
 
In terms of result, the earliest and largest investors would be buying at a lower Dynamic Valuation than the later and smaller investors. Intuitively as well as practically, this makes a great deal of sense.
 
Douglas E. Castle


FUNDING BUTTON LINK


QUOTATIONS - Immortal Wisdom - WORDS - The Building Blocks Of Language - Linked Image - By Douglas E Castle














more Quotes

This Day in History


NOTICE









Messy Matrix (Eh, Neo?) Of Social Media Sharing Links
View DOUGLAS E. CASTLE's profile on LinkedIn
Share this page
RT Button
Contact Douglas E. Castle Follow Me on Pinterest
Follow Douglas E Castle on Quora


***************
This site is proudly affiliated with Global Edge International Consulting Associates, Inc. ["GEI”]
Free Subscription to The GEI Business Daily!
Sign Up For Our Free GEI Newsletter!
Receive Our Free GEI RSS Feed!

***Follow GEI's Company Page On LinkedIn!

Valuation For Start Up Businesses - New Model by
Respond To Douglas E Castle
http://bit.ly/CASTLEDIRECT

Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Leave a Reply