Valuation guidelines encourage the use of several valuation methods as we analyse the business value from different angles and result in a more comprehensive and accurate view.
In this edition of The Startup Club Valuation Series, we look at the Venture Capital (VC) Method.
A venture capital method is a quick approach to the valuation of companies. It estimates the exit value of the company at the end of the forecast horizon and ignores the intermediate cash flows. The exit value is calculated by taking the EBITDA of the last projected year and applying the EBITDA multiple. This value is then discounted at a high rate to get the present value.
It takes into account the required returns investors expect to earn when exiting the start-up in order to have a profitable portfolio.
EBITDA of Last Projected Year X Industry Multiple/(1+Discount Rate)n Minus Capital Raised= Pre Money valuation.
n=number of Years
Following are the estimated Discount rate/ ROR based on the different stages of development of a startup:
· Idea Stage -135.93%
· Development Stage -114.74%
· Start-Up Stage - 89.12%
· Expansion Stage - 48.60%
This is subject to change based on the research and study of the individual user.
By Dulal Das
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