CapitalPitch Blog

An Easy Guide on How To Evaluate Your Startup using the Valuation Canvas

[fa icon="calendar"] 22/11/2017 8:00:00 AM / by Emlyn Scott

Emlyn Scott

The Valuation canvas is a nice easy way for investors and entrepreneurs to value a startup using four well known valuation tools. It empowers investors to check the valuation of a startup and avoid overpaying and hurting their possible investment returns. It also brings some simple rigor to the often dark arts of startup investing and valuations. You can find this resource HERE.

For entrepreneurs, valuation is one of the most problematic parts of a capital raise. We see startups pitching silly valuations all the time, with little to no real rationale as to how they came up with their valuation. That’s simply not good enough.

 

Download the Valuation Canvas

 

At CapitalPitch we like to systemize and create repeatable, justifiable reasons for our decisions. Valuation is one of those things we have spent a great deal of time looking at. We use these four methods.

We also use discounted cash flow (DCF), forward price sales and forward price earnings calculations. They are not on the canvas because those three methods require a spreadsheet.

The Valuation Canvas was designed not as a spreadsheet, so you can use it as a stand-alone piece of paper to value a startup easily in a meeting.

So let’s run through how to use the template with two examples…

Example 1

Business name: Early co.
Business stage: 

  • Pre-Seed Business
  • MVP

Revenue: No revenue

Number of founders: 2 founders

Country: US

Example 2

Business name: Live co.
Business stage:

  • Seed business
  • Live business generating $75k PM  

Revenue:

  • $30k per month as consultancy
  • $45k per month as SaaS
Country: Australia

 

Current Revenue Multiplier

The current revenue multiplier is great for valuation early stage (and later stage) businesses that have some established revenue. It is not useful for pre-revenue or very early stage revenue businesses.

 

 

Early Co

Live Co

Current recurring ARR

N/A

45,000*12 = 540,000

Multiply by 7

 

3,780,000

Current non-recurring AR

 

30,000*12 = 360,000

Multiply by 1.5

 

540,000

Valuation

 

AUD $4.32m

ARR = MRR*12
ARR = Annual Recurring Revenue
AR = Annual Revenue

 

canvas-valaution.jpg

 

Valuation by Stage

This is probably the easiest of the Rule of Thumb methods and simply values a startup by the stage of its development. The further a startup has progressed along the development pathway, the lower the startup’s risk and the higher its value. A valuation-by-stage model might look something like this (you’ll need to adjust this by country):

 

Estimated Company Value

Stage of Development

$250k to $500k

Exciting business idea, plan or presentation

$500k to $1 million

Prototype, MVP and key management

$1 million to $2 million

Live product/service and initial revenue

$2 million to $5 million

Growing revenue and some key partnership

$5 million plus

High revenue growth over a period and clear path to profitability

  

Country Multiplier

 

US

2

Hong Kong

2

Australia

1

Germany

1.5

UK

1.5

Singapore

1.5

  

 

Early Co

Live Co

Stage

1,750,000

4,500,000

Country

2 (US Multiplier)

1 (Australian Multiplier)

Valuation

USD $3.5m

AUD 4.5m

 

 

Future Valuation Method

This method works on the basic assumption that investors are looking for a 5-10x return on their investment over a 5-year period. We need to have a feel for:

  • How much could this company sell for 5 years from now? Comparables are helpful here. Any decent startup pitch should have some comparable exit analysis to get you started.
  • How much you think your investment will be diluted by follow-on rounds? The earlier you invest the more you’re likely to get diluted. You can assume that each round will dilute you 20%-25%.

 

 

Early Co

Live Co

5 year valuation

125,000,000

100,000,000

Your likely dilution

75%

50%

Your real value

150m*(1-75%) = 37.5m

100m*(1-50%) = 50.0m

Valuation (divide by 10)

USD $3.75m

AUD $5.0m

 

 

Berkus Method

Created by Dave Berkus, it was designed to apply to pre-revenue businesses and basically adds value based on the development of the business. The maximum valuation is $2m (or post rollout value of up to $2.5m). You simply add $1/2 million for each additional stage the startup has achieved. You can use it with a multiplier to post revenue businesses as well as a general rule of thumb. It tends to produce a pretty conservative valuation.

 

If it Exists

Add to Company Value up to

Sound Idea (basic value, product risk)

$1/2 million

Prototype (reducing technology risk)

$1/2 million

Quality Management Team (reducing execution risk)

$1/2 million

Strategic relationships (reducing market risk and competitive risk)

$1/2 million

Product Rollout or Sales (reducing financial or production risk)

$1/2 million 

  

 

Early Co

Live Co

Sound Idea

500,0000

500,0000

Prototype

500,0000

500,0000

Quality Management Team

500,0000

500,0000

Strategic relationships

500,0000

500,0000

Product Rollout or Sales

 

500,0000

Multiplier (higher revenue)

N/A

1.5

Valuation (divide by 10)

USD $2.0m

AUD $3.75m

 

Totals

 

Early Co (US)

Live Co (AUD)

Current Revenue Multiplier

N/A

4.32m

Valuation by Stage

3.5m

4.5m

Future Valuation Method

3.75

5.0m

Berkus

2.0m

3.75m

Average Valuation

$3.1m

$4.4m

Max valuation

$3.75m

$5.0m

Min Valuation

$2.0m

$3.75m

 

Download the Valuation Canvas

 

Conclusion

Hopefully you’ll recognize that these are just guides and they produce different valuations. You’ll get a range. Note as well that Early Co as a US based company and is valued higher on a like-for-like bases than Live Co, which is an Australian domiciled business. The reason is that Australia is a much smaller market, has less investor competition and moving internationally (which is required for the Australian business to be really successful) adds difficulty and risk to its execution strategy. 

Finally, I would note that while these four models are very helpful, you should also consider using DCF, forward price sales (discounted to today) and forward price/earnings (discounted to today). Comparable valuations are also helpful. The more valuation models you use the more confident you can be that you have valued the business correctly.

Good luck with your valuations! 

 

Topics: Startup, Investment, Valuation, Equity, Raise Capital, Venture Capital, Fundraising

Emlyn Scott

Written by Emlyn Scott

Founder & Managing Director at CapitalPitch. Co-Founder & Director OpenMarkets (www.openmarkets.com.au) – Australia’s second largest and fastest growing online broker. Former CEO of the National Stock Exchange of Australia (www.nsxa.com.au) – Australia’s second largest listing stock exchange