Corporate Financial Evaluation: Is a set of quantitative, qualitative, scientific and practical actions aimed at reaching the fair value of the company.
Determinants of the financial evaluation process:
The financial evaluation is valid for a specified period of time from the date of its issuance due to changing market conditions and the development of the startup itself. The number provided in the evaluation process may vary from side to side depending on the difference in years of experience and assumptions on which the evaluation process was built. The financial evaluation itself is also a major challenge for startups for a number of reasons:
1. There is no single theory or one approved method of evaluating startups.
2. Startups cannot be evaluated in the same way as companies or other traditional projects.
3. Startup assets are often moral only assets.
4. Unpredictability or assurance of the startup’s ability to succeed and make profits in the future.
5. The objectives and orientations of startups may change at different stages of their growth.
Startup business financial evaluation:
Startups are generally evaluated in several ways and according to the stage at which the company has reached, whether pre-revenue, post-revenue, and each method has caveats and pros:
The startup business is still in the pre-revenue phase:
The following methods apply to start-ups that have not generated actual revenue, i.e. have not yet proven successful in business and are still in the phase of idea or development:
Comparable Transactions Method comparison:
In this way, previous acquisitions or evaluations are sought, for a similar startup and within the geographical scope of the startup in question. The market value of the previous acquisition transaction with the evaluation-based startup is approached to the appropriate market value.
However, the most important caveat or disadvantages of this method is the possibility that there may not be similar transactions made in the past, as well as different circumstances, criteria and considerations of the previous evaluation.
Cost-to-Duplicate Approach cost-to-duplicate method :
In this way, the investor estimates the cost of establishing a startup similar to the one on the investment, taking into account the development efforts, difficulties and period needed to reach the current stage. The estimated cost expected later is the market value of the startup.
However, this method also has caveats: it does not take into account the value of the startup’s own idea, or the value of the company’s developed team, skills and capabilities accurately.
This method adopted 5 quality criteria that are eligible to evaluate any emerging investment:
1. Sound Idea Idea .
2. Product Prototype Product Model.
3. Quality Team Capabilities.
4. Quality Board Quality Board .
5. Initial Sales Initial Sales .
Each worker is given a fair value of only $500,000 per factor, with a total value of $2,500,000 for any emerging investment according to this method, which is one of the most successful ways to evaluate emerging investments.
Start-up Business after revenue starts:
After the startup’s success in generating revenue, its evaluation becomes clear and rather easy, as it has proven the success of the idea and the start of the project.
After the startup achieves revenue, it is evaluated according to traditional corporate valuation methods:
· Discounted Cash Flow Method
· Book value Method
· Revenue Multiplier Revenue Multiplier
Startup finance rounds:
Startups and other companies need a financial evaluation during their development and financing of their various activities, with the aim of development, operation, growth and expansion.
In order to obtain funding, startups are making great efforts to raise the necessary capital through funding rounds.
However, the majority of Start-up Business financing rounds are as follows:
· Pre-Seed: The startup is still an idea and a feasibility study in addition to the business plan only.
· Seed Funding: It is usually the first official funding round to start work on the development and creation of project products.
· Series A: Usually for the purpose of expansion and growth of the company, during this round a profitable business model is provided.
· Series B: Includes research, development, analysis and marketing financing after the startup’s success in penetrating the primary market.
· Series C: Similar to previous rounds, it focuses on entering new markets.
Thus, the market value of the startup is determined at each stage of financing, in order to determine the percentage of funding required of the total value of the startup.
· The financial evaluation of startups is a necessity and a need at each round of funding.
· The financial evaluation needs high experience and know-how with multiple evaluation theories.
· The evaluation method varies depending on the stage at which the startup has reached.
· The results of the financial evaluation may vary among experts despite following the same theory and tools.
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