Start up valuation
Hey folks, So a friend of mine tasked me to value his business. It's a tech start-up in the Middle east. I wanted to ask how I get the WACC if it's fully financed by the founder so far no outside capital has come it . He has the idea. A few engineers are already developing it... so how do we start what are some of the assumptions you might use in terms of revenue growth etc...for now its a "briefcase company" but he needs models to pitch to investors I would appreciate your guidance on this
Nobody in startup land ever thinks about WACC and I'm sure there are plenty of VCs that don't even know what it is or it is calculated. There are a couple ways you could think about this instead.
1) If the business has revenue, you can stick a revenue multiple on this. It could be an ARR multiple or even an MRR multiple. Do a little research to see where multiples are these days. Two years ago, you could get a 100x ARR multiple for a high-growth startup. Multiples today are significantly lower.
2) Your friend should have a sense of how much money he wants to raise and how much of his company he'd be willing to give up to new investors. Those two numbers will dictate valuation. For example, if he needs $5m and doesn't want to give up more than 10% of the company, then he's looking at a floor of a $50m post-money valuation and can negotiate with investors with that in mind.
Adding to the 1st comment here:
DCF analysis would not be any relevant here unless in the rare case if the "startup" is cashflow positive and profitable.
Depending on the business model, ARR/MRR Multiple are applicable valuation framework for a software as a service or subscription booking products. Similarly, GMV and Net Revenue for Online Marketplace/Commerce platforms, Gross Transaction/Total Asset Managed for Fintech, LOI/Pre-Order for hardware/space tech etc
Usually VCs would use multiples from publicly traded companies as a comparable benchmark. Usually if the startup is growing fast, a valuation premium will typically be applied to reward the pace of growth.
Hoping onto the back of this comment but sometimes if you have the info you can even use private comps where you have the multiples of similar startups at a similar stage of growth and funding and can benchmark too
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