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Valuation is an analysis highlighting the value range of your project. It defines a company’s value in a nutshell. It serves as a basis for all fundraising negotiations.
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6 weighted methods for a fair valuation!
Enjoy an adapted method
Thanks to a methodology adapted to projects and innovative companies, Estimeo’s valuation helps breaking down the asymmetry of information that can exist during a negotiation between a project and an investor. Raise funds faster and easier.
Discover our various weighted methods for a fair valuation!
The dilutive method is based on two criteria: on the one hand, the amount of funds that the entrepreneur wishes to raise to cover his or her equity needs for the next 12 to 24 months, and on the other hand a standard dilution rate. The latter is determined by Estimeo according to the score generated by its proprietary algorithm and market data relative to the startup.
This elementary method has little weight in the calculation of the final valuation, but is nevertheless relevant. Indeed, it puts into perspective the attractiveness of the company in terms of risk and potential compared to all the startups in the market and contextualizes the valuation in the global innovation financing market.
First Chicago Method
The discounted free cash flow (DCF) valuation method is one of the most widely used approaches in the financial evaluation of startups. Based on the startup’s projected financial cash flows, the valuation is computed by adding up the discounted free cash flows. The discount rate used varies according to the stage of development of the startup (seed, scale-up, etc.)
This method is most relevant for startups that already generate a certain level of revenue, but has a proven methodological soundness to calculate the value of a company.
The accuracy of the DCF valuation will depend on the reliability and consistency of the startup’s financial projections. Therefore, in order to counteract the frequent over-optimism of entrepreneurs in their financial forecasts and to objectify the analysis, Estimeo is inspired by the “First Chicago Method” and suggests two alternative scenarios based on a parameter determined by an expert human analysis. This parameter allows for an upward or downward adjustment of the modelled forecasts.
Since the analysis includes one or two less optimistic scenarios, the discount rates applied are decreased by a few percentage points to indicate the use of scenarios with a higher probability of occurrence.
Valuing an early-stage startup in the acceleration phase on the basis of its current financial results can lead to a relatively modest outcome that does not take into account the project’s true value creation potential.
The VC method compensates for this by determining a theoretical economic value based on projections of the startup’s activity level over a defined time horizon that varies according to its stage of maturity.
To do so, this analogical valuation method takes into account several aggregates such as: the startup’s financial projections, transactional multiples of sectors and business models, and potential/risk ratios determined during the rating process.
The first calculation step consists in defining an exit value based on the financial projections provided and extended if necessary over several years until a possible exit horizon (calculated and standardized according to the current maturity of the project, independently of the entrepreneur’s forecasts), as well as on a transaction multiple from public market data. The resulting value is usually high and reflects the valuation of the startup at the time of a potential future exit. To determine the real value of the startup from this first value, we integrate within the calculation a last key parameter: the discount rate. The latter allows us to establish the current value of the startup by reflecting the level of risk of the financial cash flows envisaged by the project leaders.
The Scorecard method, or “Bill Payne Method” named after the Business Angel who theorized it, is based on the potential and risk rating defined by Estimeo.
This method evaluates a startup by comparing it to similar companies.
An initial valuation is calculated based on a benchmark valuation observed on the fundraising market for startups at the same stage of maturity as the one under study. This value is then algorithmically revised upwards or downwards according to the relative performance of the startup compared to similar startups in the Estimeo database.
Thus, a startup with an above-average score will be considered as performing particularly well and will be awarded a premium.
The Berkus method, created by Dave Berkus, is similar to the Step-Up method and assumes a fixed maximum valuation. It assigns the startup a score calculated algorithmically for each of the five criteria used according to the scores obtained during the analysis.
Each criterion has an initial value equal to 500,000€ to which we index a performance index according to the answers provided in the valuation form.
It is mainly used for young companies, as the maximum valuation cannot exceed 2.5 million. It will be excluded from the calculation of the final valuation in the case of a mature startup and with an established business history.
This method developed by Estimeo is not very different from the Scorecard method but uses different calculation methods.
Instead of using values derived from the startup’s operational maturity, this method is based on the financing round envisaged. The funding round defines ceiling and floor valuations that correspond to the minimum and maximum values that an investor is usually willing to invest in a startup for this funding round. These values are derived from recent market studies and are continuously updated by Estimeo.
The valuation is then defined by applying a mathematical calculation algorithm with exponential progression. It assigns a performance coefficient depending on the final lettered score delivered by the Estimeo algorithm, which situates it between the ceiling and floor value.
Consequently, the better a startup performs, the closer the valuation obtained will be to the ceiling value observed on the fundraising market. The exponential progression of valuations ensures a representation consistent with reality, as only the most successful startups manage to reach the maximum valuations.
The Step-up method generates an incremental valuation linked to the presence of factors or the achievement of development stages that will reinforce the solidity of the project. These factors assess the overall risk as well as the true value creation potential of the startup.
This method is more suitable for very young companies (pre-seed and seed), as the total valuation cannot exceed 2.5 million. It will be excluded in the case of the valuation of a more mature company.