How to value a start-up?

Abstract

One of the ongoing concerns of entrepreneurs is what valuation of their businesses they will get by investors, since they perceive it as the price at which they are selling their company. The valuation of each start-up is very important and will determine the percentage of the company that will be delivered to the investor in exchange for their money. In the initial stages of a company its value may seem close to zero due to nonrevenue business model or negative free cash flows, but why is its valuation much more than that? Valuations made in the initial stages of a start-up have more to do with the potential for growth than with its current value. That being said, valuation is an essential aspect for both the entrepreneur and the investor, and we will deal with it in detail in this research paper. Valuation is assessing the value of a company and, since a start-up often faces binary events, things that may or may not happen in the future, there is a lot of room for assumptions and perceptions. Furthermore, start-ups often happen to be young businesses in initial phases, so usually there is little to no historic data available that could help on the financial analysis of the company. Thus, assessing the value of an early stage company does not seem trivial at all, mainly due to the uncertain growth potential, limited financial data and few comparable listed companies or precedent transactions. The aim of this research paper is to highlight start-ups’ general characteristics, including life stages and financing methods, assess which valuation methods are most suitable and come up with a valuation of a real investment opportunity through a case study