One thing that can sometimes be intimidating about the entrepreneurial ecosystem is that when entering and growing interest in it, one is usually faced with an endless number of unfamiliar terms, concepts, and processes. One term that is sometimes thrown around (we have admittedly referred to it in the previous Intro to Entrepreneurship articles and Entrepreneurship Crash Course articles) is that of a startup’s valuation.
Business valuation is a process of determining the economic value of a business or venture. With startups, it can be a bit of a tricky process because of the limited information available (lack of actual revenues, profits, and sales, for example). A startup’s valuation is something that will usually come up when trying to raise funds, for example through an angel investor or a venture capital firm. Similarly, when getting involved with accelerators or incubators a startup’s value will be of importance.
There are several different approaches that can be used by financial analysts when valuing the Startup. One approach is the Berkus method, which involves assessing five important risk Factors in a business and assigning them a certain value. These factors are basic value (the business model), product prototype, quality management team, strategic market relationships, and initial sales.
Another method is the Cost-to-Duplicate approach. This method involves taking into account all the costs and expenses involved in the Startup and the development of its product. This is done in order to determine (or estimate) how much it would cost to duplicate the startup, hence the name of the method.
Along with the Berkus method and the Cost-to-Duplicate method, there are several other approaches that are often used when valuing a pre-revenue venture.