How to Do a Startup Valuation: A Step-by-Step Guide for Founders

Did you know some companies called “hectocorns” are now valued at over $100 billion, while their smaller cousins, “unicorns,” are worth just $1 billion?

Determining a startup’s valuation isn’t as simple as it might seem. The process becomes complex because startups have limited revenue history and uncertain futures. Startup valuation requires more artistry than scientific calculation. Your startup’s worth plays a vital part when you seek angel investment or plan your next funding round. This knowledge helps you raise funds and determine ownership stakes effectively.

We created this complete guide to startup valuation methods to help you understand the process better. You’ll learn everything about valuing your startup at any stage. The guide covers various methods, from the Berkus approach with its $2.5 million pre-money valuation cap to advanced techniques like discounted cash flow (DCF). Want to find what your startup is really worth? Let’s take a closer look.

Why Startup Valuation Matters at Every Stage

“Regardless of yield, when investments are absent of value, cash is always a better option than permanently losing money.” — Warren Buffett, Chairman and CEO, Berkshire Hathaway; widely regarded as one of the most successful investors of all time

Your startup’s valuation goes beyond a simple price tag—it’s a strategic decision that shapes your business’s future. The valuation sets the groundwork for key talks with investors, co-founders, and future team members.

Helps determine how much equity to give up

The valuation you set directly controls how much of your company you keep as it grows. Early backers get equity when your company is worth the least, so their investment buys a bigger piece of the pie. This basic link between valuation and equity lays the groundwork for future funding talks.

Industry experts say founders usually sell 20-35% of their company in Series A rounds. This big ownership chunk shows why getting your valuation right matters right from the start. A low valuation means giving away too much too soon, while a high one could make it hard to meet future expectations.

Founders share a clear goal: get the highest valuation with the least dilution. This balance matters because:

• Your valuation sets what investors pay per share to invest in your company
• The right valuation gives you fair equity in exchange for capital
• New funding rounds naturally reduce your ownership share

Your funding stage plays a big role in valuation. Early-stage startups usually have lower valuations due to higher risks, which affects how much ownership you give up. Moving through Series A, B, and later rounds with proven business models and better financials can boost your valuation and reduce dilution for each dollar raised.

Guides funding strategy and investor expectations

Valuation does more than just set equity—it shapes your entire fundraising plan. A well-calculated valuation helps you plan long-term capital needs and keeps funding requests realistic. The numbers also help with planning, setting goals, and making smart budget choices.

Finding the sweet spot in valuation means striking a balance. One expert warns, “Beware of over-inflating your seed stage valuation; hitting the required milestones could prove impossible”. High valuations bring high expectations. Missing targets after an inflated valuation might force a down round or worse.

Your valuation influences how investors think about your company:

• It shows them how well you can use new money to grow and reach milestones
• They use it to measure their risk and potential returns
• More interested investors often let you push for a higher valuation

Smart founders see each funding win as a chance to celebrate and think ahead. Every valuation choice creates standards for future rounds and affects your ability to attract partners or plan exit strategies.

Knowing these dynamics helps you make smart valuation choices that match your long-term goals, not just your current cash needs.

Get Ready: What You Need Before Valuing Your Startup

A proper preparation is vital to accurately assess your startup’s worth before calculating valuations. Your credibility with potential investors depends on complete documentation and a solid grasp of key metrics. This makes the valuation process run smoothly.

Key documents to prepare (pitch deck, financials, MVP)

Reliable documentation forms the foundations of a credible startup valuation. Your financial records should be ready quickly. These include:

• Up-to-date profit and loss statements (for the last 3 years if available)
• Balance sheets that show your assets and liabilities
• Cash flow statements revealing your company’s financial health
• Detailed business plans and reliable financial projections

Your pitch deck needs careful attention too. Startup financial reporting lacks universal standards, but your pitch deck should highlight your startup’s value to potential investors. Make sure to include slides about:

1. The problem your startup solves
2. Your unique solution or product description
3. Market chance and size analysis
4. Business model and revenue strategy
5. Competitive landscape
6. Team composition and expertise

More than that, a Minimum Viable Product (MVP) makes your valuation position stronger. An MVP lets you test the simplest version of your product in the market to get feedback and traction metrics. It proves your concept works and shows you can execute. Deep tech startup investors want to see specific technical expertise and experience. This builds trust that the team can build the MVP.

Important metrics to track (TAM, CAC, LTV, burn rate)

Key metrics help establish a credible valuation. They show your understanding of the business and communicate growth potential to investors.

Total Addressable Market (TAM) shows the total revenue chance if you captured 100% of your market. Investors use TAM with Serviceable Addressable Market (SAM) and Serviceable Obtainable Market (SOM) to evaluate investment potential. Market size stands out as the most important factor when evaluating a startup’s potential.

Customer Acquisition Cost (CAC) reveals the cost of getting a new customer. The most accurate CAC includes the full cost of acquiring users per person. Investors focus on paid CAC more than blended CAC. They calculate it by dividing total acquisition cost by new customers from paid marketing.

Lifetime Value (LTV) predicts the estimated lifetime profit from each customer. The best companies maintain LTVs higher than their CACs. The most precise LTV calculation uses Contribution Margin After Marketing (CMAM) per customer yearly, divided by the churn rate.

Burn rate shows how fast your startup uses money. Investors look at net burn (gross burn minus revenue) to see how long your funds will last. This metric matters because startups fail when they run out of cash without time to raise funds or cut expenses.

These metrics build investor trust and create a strong base for your valuation work. The right documents and metrics help you pick and use the best valuation method for your startup’s stage.

Choose the Right Valuation Method for Your Stage

“Startup valuation can be calculated using different approaches, depending on the stage of the company and available financial data.” — Technext Editorial Team, Technology and business news platform, frequently quoting industry experts and summarizing best practices

Your startup’s development stage plays a crucial role in choosing the right valuation method. Each growth phase brings unique challenges and metrics, so you need to adapt your valuation approach as your company evolves.

Idea stage: Berkus and Scorecard methods

Qualitative approaches give more realistic valuations than financial projections when startups are still in the pre-revenue phase. Dave Berkus created the Berkus Method, which gives monetary values (up to $500,000 each) to five success factors: sound idea, prototype, quality management team, strategic relationships, and product rollout/sales. This creates a maximum pre-money valuation of $2.5 million.

The Scorecard Method looks at similar funded ventures and compares your startup against them. It weighs factors like team strength (30%), market opportunity (25%), product/technology (15%), competitive environment (10%), marketing channels (10%), capital needs (5%), and other factors (5%). Investors can adjust valuations based on your startup’s strengths compared to similar companies.

MVP stage: Cost-to-duplicate and risk factor methods

The Cost-to-Duplicate approach becomes useful once you have a prototype. This method adds up the cost to build a similar startup from scratch, including research, development, patent costs, and prototype creation. Note that while it gives an objective starting point, it often undervalues your venture by not accounting for future potential.

The Risk Factor Summation approach starts with an original valuation and adjusts it based on 12 risk categories such as management, competition, and technology. Each risk factor gets a rating (+2 to -2), which adds or subtracts $250,000 per point from your baseline valuation.

Early traction: Market multiples and VC method

Market Multiple approaches work better when you have your first customers. You can compare your startup with recent acquisitions of similar companies. The multiples like EV/Revenue typically range from 1-5x for slower-growing startups and 10-20x for faster growing ones.

The Venture Capital Method, which Bill Sahlman developed in 1987, looks at potential return on investment through six steps: estimating investment needed, forecasting financials, determining exit timing, calculating exit multiple, discounting to present value, and determining ownership stake.

Revenue stage: DCF and book value methods

Discounted Cash Flow (DCF) analysis becomes especially valuable for startups with steady revenue streams. DCF estimates future cash flows and brings them back to present value. While complex, it offers a future-focused valuation based on projected performance instead of historical data.

The Book Value Method calculates your company’s net worth by subtracting total liabilities from total assets. This straightforward approach works best when startups have substantial physical assets or intellectual property.

How to Apply Popular Startup Valuation Models

Let’s walk through how to apply three popular valuation models now that you’ve picked the right method for your needs.

Step-by-step: Scorecard method

The Scorecard method helps you value pre-revenue startups by comparing them to similar funded companies. Here’s how to make it work:

1. Identify your baseline valuation: Look up the average pre-money valuation of similar startups in your region and sector.
2. Assign weights to key factors:
   • Management team strength (0-30%)
   • Opportunity size (0-25%)
   • Product/technology (0-15%)
   • Competitive environment (0-10%)
   • Marketing/sales/partnerships (0-10%)
   • Need for additional investment (0-5%)
   • Other factors (0-5%)
3. Score each factor: Rate your startup against the average (1.0). Give higher scores (>1) or lower scores (<1) for each category.
4. Calculate adjustment factor: Multiply each score by its weight and add up the results.
5. Determine valuation: Your final number comes from multiplying the average pre-money valuation by your total adjustment factor.

Step-by-step: Discounted cash flow (DCF)

DCF works best for startups with predictable cash flows. Here’s the process:

1. Forecast cash flows: Map out your startup’s free cash flows for 5-10 years.
2. Calculate discount rate: Most use Weighted Average Cost of Capital (WACC). Riskier startups need higher rates.
3. Apply discount formula: Use PV = CF / (1+r)^n for each year. Here, r is your discount rate and n represents the year.
4. Estimate terminal value: You can use the perpetual growth formula [TV = (FCFn × (1+g))/(r-g)] or exit multiple approach [TV = Financial Metric × Trading Multiple].
5. Sum all values: Add up the present value of all cash flows plus terminal value.

Step-by-step: Venture capital method

Bill Sahlman’s 1987 VC method works backward from exit value. Here’s how:

1. Estimate investment needed: Figure out how much capital you’ll need.
2. Forecast financials: Project your sales and profit for exit year (usually Year 5).
3. Determine exit timing: This typically ranges from 3-7 years based on what investors expect.
4. Calculate exit value: Take your projected earnings and multiply by the right industry multiple.
5. Discount to present value: Apply your target return rate (early-stage startups often use 30-40%).
6. Calculate ownership stake: Divide investment by post-money valuation (example: $8M / $27M = 30% ownership).

These methods are a great way to get different perspectives. Try using several approaches to find a solid valuation for your startup.

Using Your Valuation in Fundraising Conversations

Your startup’s valuation is just the beginning. The real challenge lies in convincing investors that your numbers add up. Your success in fundraising depends on both the valuation and how well you present it.

How to justify your valuation to investors

You need solid evidence to back your figures and gain investor confidence. The most compelling way is to support your valuation with hard data rather than hopeful projections. Clear logic and transparency will help you win investors during valuation talks.

These key elements will help justify your valuation:

• Track record: Show your team’s past startup wins or experience at high-profile companies
• Product progress: Build credibility with a working prototype that proves market fit
• Customer interest: Share feedback from potential customers, even at pre-product stage
• Market opportunity: Show how your solution serves a large, expanding market
• Future growth trajectory: Paint a clear picture of investor returns through revenue, profit, and market share projections

Keep in mind that investors will project your company’s value at the time of liquidity. They’ll then discount that future value based on their expected return rate.

Avoiding overvaluation and down rounds

Setting unrealistic valuations can kill your startup. Statistics show that down rounds jumped from 5% to 12.5% in Q3 2022. Such situations hurt your credibility, shake investor trust, and demoralize your team.

You can dodge this bullet by:

1. Be realistic about fundraising needs: Raise only what you need and skip large rounds that push inflated valuations
2. Focus on revenue over growth: Build sustainable revenue streams instead of chasing rapid expansion during tough economic times
3. Consider multiple valuation methods: Using just one approach might give you a distorted view of your startup’s value

Most investors look for 20-25% equity in each round. High valuations make it hard to hit your targets with limited funds. A realistic valuation that you can prove over time beats making promises you can’t keep.

Conclusion

Startup valuation is a vital foundation for successful fundraising and business growth. Your preparation, choice of valuation methods and clear investor communication help establish realistic valuations that attract capital. This approach lets you retain control while meeting growth expectations.

Your valuation is more than just a number – it defines your entire fundraising experience and affects key decisions about equity, growth strategy, and resource allocation. A successful startup valuation needs to strike the right balance between optimism and realism, backed by solid metrics and clear documentation.

Your startup’s growth stage determines the right valuation approach. Qualitative methods like Berkus or Scorecard work best for early-stage companies. Revenue-generating startups should use sophisticated approaches like DCF analysis. Whatever method you choose, concrete data and realistic projections must support your valuations.

Build genuine value instead of pursuing inflated numbers. A well-justified valuation paired with strong execution and strategic planning will help your startup attract ideal investors and achieve eco-friendly growth.

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