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How does startup valuation work?
Startup valuation can be complex and contentious, fraught with hype, emotion, and egos. At its core, however, startup valuation is simply an exercise in Business 101: what is the company worth today, and what will it be worth in the future?
There are several different methods for valuing a startup, but the most common is the venture capital method. This approach values a company based on its expected future cash flows. Factors such as the size of the market opportunity, the strength of the team, and historical performance are all taken into account to determine a company’s potential for growth.
The discounted cash flow (DCF) method is the other primary method for valuing startups. This approach discounts future cash flows back to the present day, using a Discount Rate that represents both the time value of money and the inherent riskiness of startup investments.
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