Startup valuation model - Free Excel
The valorization of a startup is closer to an art than to a science. In this article, we look at how to value a company, how it fits for a startup and you also find an Excel model of how to value a startup for free download.
Valuation of a company
The model generally used for the valuation of a company is the discounted cash flow method or, in other words, the present value of all future profits of a company.
It sounds complicated but I will try to explain it clearly and simply here.
It all starts with understanding an investor's thinking when making an investment. This reflection is very similar when he/she buys a share, a building or a company, he/she asks the question: "How much money will I receive per year? For a building, it is the sum of the rents per month, all costs and repairs/investments. For a share, it is the dividends more or less the variation in the share price. For a company, in simple terms, it is the profit generated each year.
It must be understood that an investor can invest in several projects and therefore he is considering investing in a company in order to invest in a building or any other possibility. So he wants to know how much he will earn.
The calculation of the company's value is done by looking at the financial results of the last few years and planning for the next 5 to 7 years. We add the benefits and multiply them by a ratio to show that they are not yet there but arrive in the future and hop, we have a valuation.
For a startup, it's unfortunately not that simple.
Since a startup has very little profit or even a history of profit and the company is planning strong growth, the models used to value a company do not work.
The investor will therefore try to calculate at what value he will be able to sell to know at what amount he must buy now and in bulk at what value.
An investor will think like this: at what value will I be able to sell the company in 4, 5 or 7 years. He/she will look for a way to calculate this by looking at growth plans but also if similar startups have been purchased recently.
If the investor thinks he can sell the company for 50 million in 5 years. It divides this amount by a risk coefficient that can range from 60% to 90% depending on the startup. As a result, he finds the current value after his investment.
Download the Excel template below to try it out for your startup yourself!
Improve the valorisation of your startup
To improve the value of your startup, you must reduce the risk of project failure. Here is a non-exhaustive list: