How Much Is Your Startup Worth?
Venture capital (“VC”) – financing and investing in early-stage or emerging companies deemed to have high growth potential – is big business.
Southeast Asia has ridden this wave of new opportunities. Startups in Singapore closed 353 financing deals worth USD$10.5 billion in 2018, an increase from the 160 deals worth USD$0.8 billion in 2012.1
Investors are drawn to the high-risk, high-potential-return of startups, a lottery that can reap exceptional rewards. The first question many investors ask when weighing-up an opportunity is: what is the business worth? Herein lies the challenge of startup valuation.
Where to begin?
Traditional valuation methods rely on estimates of current or future financial performance and its corresponding risk. However, startups can be some way off generating sales, let alone profits, when investment is required and generally face additional risk compared with more established businesses. Indeed, valuing startups is one of the hardest problems a valuer is likely to face, as evidenced by the fact that a number of recently listed startups have traded initially below their opening price on the public markets (for example, Lyft, which priced its initial public offering (IPO) at USD$72 per share but has since fallen to around USD$50 a little over a month after its listing), and hovering around USD$40 at the time of this article’s publication. Furthermore, investors are questioning the business models of startups and growing more cautious of their high valuations, in situations where a firm has not reported a profit to date.2 So how do investors and founders navigate through this complexity? This article proposes and briefly reviews a framework that can be used to value startups.