Startup Valuation: Theories, Models, and Future

Startup Valuation: Theories, Models, and Future

Murat Akkaya (T.C. İstanbul Arel University, Turkey)
Copyright: © 2020 |Pages: 20
DOI: 10.4018/978-1-7998-1086-5.ch008

Abstract

This chapter analyzes startups and methods for valuing them. Startup means a process for activating a job or action. Startup as a young innovative company has a dominant and key role in modern economies. Startups are newborn or young companies struggling to achieve their potential and growth. One of the most challenging issues in corporate finance is to decide on firm valuation. It is even more difficult to evaluate companies that do not generate income. Deciding the value of a Startup is similar to valuing a specific table. The valuation at this stage is very important. Since startup is a company, it is necessary to look at the methods developed specifically for Startups. Nasser (2016) determines 9 different valuation methods to determine Pre-Money Valuation; Berkus Method, Risk Factor Summation Method, Scorecard Valuation Method, Comparable Transactions Method, Book Value Method, Liquidation Value Method, Discounted Cash Flow Method, First Chicago Method, and Venture Capital Method. Traditional valuation methods are also applicable in valuation.
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Startup

Startups are newborn or young companies struggling to achieve their potential and growth. Startups create opportunity for new jobs. Moreover, small innovative and technology companies have increased the growth of world economy in recent years.

Newborn companies have some common characteristics despite diversity in their forms. These are (Damodaran, 2009):

  • They don’t have histories or they have very limited history with one or two years of data.

  • They have small or no revenues and they result in operating losses

  • They need private equity.

  • Most of them don’t survive and fail.

  • Multiple claims on equity.

  • Illiquid investments ocur.

Common characteristics of startups are analyzed by many studies. According to these studies, most of startups fail especially in the very early stages. There is high rate of failure in theese companies. Less than one third of young companies survive (Vesper, 1990). Lack of finance, business knowledgeand technology, team management problems, lead to startup problems.

Startups which can survive have a significant role in economies and they create success stories (Martinsons, 2002). Blank & Dorf (2014) define startup as a enterpreuners searching repeatable and scalable business model under extreme uncertainty.

A startup is (Oliveira & Zones, 2018):

  • Business model in which a startup searches oppotunities to increase customer’s values and /or transform this value as a revenue for the startup.

  • Repeatable as an ability of making products constantly available to the end-user regardless of demand and with little need for customization and adaptation.

  • Scalable as an ability to increase scale by customers, and growing. Thus, operating costs decrease comparing to income.

  • A company that appears under extreme uncertain conditions.

Key Terms in this Chapter

Valuation: Valuation is a determination of how much a transaction can be realized at a price if a company is exchanged with its current form.

The Discounted Cash Flow: The present value of the future cash flows of a company or a project will be reduced by a discount rate and the cash flows of the company will be deducted from the net cash amount of the company. This value shows us the value of the company or project.

Angel Investment: Angel investment is a high-risk type of investment that leads entrepreneurs who have a minority share in entrepreneurs with high growth potential.

Startup: Startups are new born or young companies struggling to achieve their potential and growth.

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