Question

this issue is valuation for a startup company. What do you find to be the most challenging when working with valuation? Why do you think that is? Also, consider what you think to be the most appropriate valuation method. Explain.   

Answer 1

The most challenging part when working with valuation, especially with regards to valuation for a startup company is the actual finding of data. Unlike an established company a startup does not have a heap load of historical financial data. A startup has just started its operations and hence there are no historical financial data available for a startup. Valuation usually involves finding the present value of future free cash flows that a firm will generate. The future cash flows are forecasted on the basis of historical financial data of a company. But such an approach is not possible in case of a startup venture and in the absence of historical financial data it becomes difficult to forecast and predict future cash flows for a startup and hence it becomes difficult to value it.

The most appropriate valuation method for a startup is the comparables method. This method looks at the implied value of other similar startups and considering comparable ratios and multiples. Another appropriate method is the venture capital method. This method uses the following formula: ROI = Terminal value/Post money valuation. Post money valuation = Terminal value/Anticipated ROI.