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I once again was asked what method I use to calculate the valuation
of start-ups. Warren Buffet said it best in the year 2000 on valuing
start-up companys, "If I taught a class, on my final exam I would take
a start-up Internet company and ask my students, 'How much is this
company is worth?' Anyone who would answer, I would flunk." I love
that quote because it highlight how inexact valuing start-up is. But
that doesn't help matters. Venture investors still need to value
businesses even in the earliest stages.
Valuations for start-ups tend to be stage bracketed and increase as key risks in building the business are mitigated (premiums to the stage bracket ranges may be applied if super management is in place from the start or the start-up is in a frothy market like energy). Those key risks include management risk, technology risk, market risk and financing risk. These risk are reduced as a business travels through its life cycle: pre-product/pre-revenue, post-product/early-revenue, post-product/scaling revenue. As a company reaches maturity, more traditional cash flow based valuations can be employed.
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