Startup Evaluation Methods
Venture capitalists, investors, seed-fund managers, and founders of startup companies in different sectors face the challenge of valuation which is currently based on estimations and assumptions. As the companies start growing and generating new revenue streams new valuation methods need to be built.
This paper reports the results of our research on the application of existing valuation methods to evaluating startup businesses, emphasizing those associated with risk measurement and contract negotiations.
Out of this survey work, we seek to identify the dependency of the valuation method results to the stage of the startup and its revenue forecasts, its growth and viability scorecard, the financial and market risks as well as the knowledge that the investors have about the market domain.
On the assumption that the complexity of a startup valuation is high due to limited information available regarding their business model, their intellectual property, or under- (or over-) estimated figures regarding sales and costs, our objective is to present the key valuation methods for startups, the most important investment criteria used by venture capital investors, and any special criteria and valuation methods depending on the domain.
Our approach to this research was to define the common stages of startups and then compare them to the practices and techniques applied by three main valuation methods.
The assessment of these methods based on the aforementioned research questions is the main contribution of this paper, and the conclusions section concludes it with future research work in this direction.
Keywords: startup evaluation, startup performance, startup validation, and selection; analysis of collective decision-making, investment decision
