How to value your startup? Part 2
In the first part, we already discussed about Definition and the importance of valuing startups. It's time to have look at Common startup valuation methods.
There are different methods that can be used to value a startup like the Berkus method, comparing it to a successful startup in the field (Comparables Method), or using more complex approaches such as the VC method, Discounted Cashflow Method, Asset-based method ... In this article, we will introduce 2 valuation methods: Revenue Multiples and Scorecard as these are simple, relative valuation methods that are mostly employed, especially for tech startups in Series A and B Funding Round.
a. Revenue Multiples
This method uses the correlated information between successful businesses in the industry that have IPOs and the startup to be priced in order to make comparison, rate and then estimate the value of the startup.
The process of valuing the startup using this method is as follows:
  • Step 1: Find IPO businesses which have similar business models to the startup to be priced, put down their Enterprise Value (EV) and Earnings.
  • Step 2: Calculate the average EV / EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) of those IPO companies.
** Please note that the ratio EV / EBITDA is not a fixed figure but a continuously varied one over a period of time, depending greatly on the average earnings of companies in the industry.
  • Step 3: Use the average ratio calculated in Step 2 to determine the valuation of the startup to be priced.
E.g: Supposing you are a Vietnamese medtech startup. According to data publicized by Viet Capital Securities (VCSC), companies in pharmaceutical and health industries currently register an average EV / EBITDA ratio of 14x. If your EBITDA is $ 500,000, then your pre-money valuation is $ 7 million (14 x 500,000).
b. Scorecard Method
In this method, investors will list out 5-7 consideration factors of different weights. It should be noted that, each investor will have their own list of consideration factors and different views regarding how the factors are weighted. For example, investors from ThinkZone Ventures value ​​a startup based on six factors: team quality and prior experience, market size, offering quality or technology differentiation, market competition intensity, marketing and distribution strategy and other factors like customer feedback with the weights of 30%, 20%, 20%, 15%, 10% and 5% respectively. Then, their scoreboard will look something like this:
Description: Image for post
The valuation process for this method would be:
  • Step 1: List out consideration factors and assign weight to each of them.
  • Step 2: Identify the related position of the startup compared to its peers in each factor considered
  • Step 3: Calculate the resulting factor for each category by multiplying the weight of the category with the relative position of the startup
  • Step 4: Sum up all the resulting factors to get the valuation multiple
  • Step 5: Determine the pre-money valuation of the startup by multiplying the average valuation of peer startups (in the same market, at the same period) with the valuation multiple found in step 4.
As in the example above, the valuation multiple is 1.12. Assuming the peer startups has an average valuation of $ 6 million, then the startup's pre-money valuation would be 6 x 1.12 = $ 6.72 million.
You may notice that the two valuation methods above produce different results. This is because each investor, based on their investment objectives and experience, will have different views on the risks and opportunities for the same startup. In other words, their valuation is inherently subjective. Furthermore, some valuation methods are more suitable for certain industries than others. For example, you wouldn't use asset-based method to value a consulting business which have only few assets; instead, an income-based approach like discounted cash flow would be more appropriate.

Here are the part 1 and 3 of this article:
Part 1:
Part 3:
Tác giả: Cao Xuân Nhật