According to the research, 70% of startups fail due to premature scaling. A comprehensive business evaluation assists founders to understand how much investment is needed at each growth stage. Startups seeking rapid development without properly evaluating their resources often face a harsh reality, ultimately resulting in their failure. To avoid this problem, founders must know how to evaluate their companies and predict future growth.

How to Calculate the Current Value of a Company 

Calculating the company's value at the present moment is possible based on an analysis of its current conditions and a prediction of the future ones. There are various approaches available, each tailored to specific business scenarios: revenue method, asset valuation, comparable analysis, precedent transaction method and others. In the realm of venture capital, the primary method is a multiple approach. It involves measuring revenue and specific industry multiples. Sometimes we also take EBITDA (Earnings before interest, taxes, depreciation, and amortisation) into account instead of revenue or even combine revenue and EBITDA for calculation.

Multiples represent industry coefficients that give an idea of the growth potential of a particular economic sector and are calculated based on industry sales or comparable companies in the sector. For example, you can find data that says that now the multiple for the financial sector is 7-12x, for education it is 5-12x, etc.

In order to determine which multiple to use for a particular case, it is necessary to analyse external sources that provide information on the funding rounds of similar companies, for example PitchBook, CB Insights, Preqin, or Tracxn. It is also crucial to compare the growth stages, geographical realities, and product features – these are the three primary criteria you need to take into account when comparing industry examples to your startup. For instance, if you consider an early-stage online educational platform based in India, it would be weird to compare it with a developed American educational company. These are completely different markets and their life stages, so the multiples will be different too. Instead, try to find industry examples that share similar characteristics and objectives as yours.

After taking these two steps: 1) measuring revenue 2) counting a multiple, you need to multiply them on one another. For example, with an EBITDA of $5 million and comparable EBITDA multiples of between 4 and 6 times, the company would likely be valued between $20 million and $30 million. You should also look at some factors that can add or subtract approximately 0.5x-1.5x to the company's multiple, the main factor is the growth rate from month to month, but other things such as geographic distribution, brand strength and recognition, size and scale are also important. 

Various economic trends such as inflation and interest rates also significantly influence business valuation in 2024. The current macroeconomic landscape especially has seen rising inflation, which impacts the costs of raw materials, increases salaries expenses, and other operational costs. Consequently, this complicates the prediction of the prospective revenue streams and cash flow of the company which are the crucial elements of the business valuation.

I have also noticed that founders frequently make the mistake of relying on just a couple of examples from the market when making their calculations. In my opinion, they should consider as many companies as possible – around 10 would be ideal. Moreover, it is crucial to provide this analysis to investors, allowing them to understand how you assess your company's value. This will help to facilitate the negotiation process and align your visions.

How to Predict a Company's Valuation and Why It's Important

The desired valuation can be broken down into all the key business metrics that need to be tracked and grown month-to-month and year-to-year. This allows you to determine how much the startup should be worth, for instance, in two years to achieve the goal in five years. Having such a well-defined plan will assist you in “navigating the course” of your startup from time to time. With annual and quarterly planning in place, these are great opportunities to compare your current company’s value with the desired outcomes, as well as assess the status of all key business metrics.

Nevertheless, founders should remember that external factors can significantly impact your trajectory too. Even if your internal metrics are progressing according to the plan (your user base is increasing or your revenue is growing), it is still essential to remain vigilant about the state of the market. If the market conditions shift, it becomes necessary to recalculate your estimated value. The research by BizEquity shows that overall multiples have greatly contracted over the past years – from more than 8x in 2018 to 5x in 2023.

The educational market represents a good specific example of this phenomenon. Following the boom that occurred in 2020–2021, it is now in a period of turbulence – investor interest in the market has declined. The multiples we used 3-4 years ago are no longer relevant. In other words, if an EdTech startup previously believed that their multiple would be 8x, now it may only reach 6x. This means that a company will need to reevaluate its strategies for revenue growth in order to achieve the desired level of capitalisation.

The assessment of a startup's current state and future projections should be conducted primarily by the founder. They typically outline all strategic aspects, including growth plans, product introductions, associated costs, revenue projections, business development metrics, and management strategies. After that, the company may involve a financial analyst to help understand which components of the business need to be strengthened and what to pay attention to in order to achieve a higher evaluation score.

Growing Your Startup Value from Dream to Reality

After assessing the current state of the company and determining its desired valuation, you can plan the steps to achieve this goal. Before doing that, you need to consider several preparatory points: 

1. Create a financial model for your business that will incorporate all relevant data, inflation rates, detailed breakdown of expenses and predictions for a period of interest. It will serve as a roadmap, allowing to project potential outcomes for any number of years. 
2. Assess market trends. You need to monitor market growth or decline on a monthly basis. That will give you valuable insights into the trajectory of the market's evolution, helping to make informed decisions about your business strategy.
3. Analyse competitors in order to assess your position in the market and identify areas for improvement. This involves examining their market value, the metrics they use to attract investment, and the strategies they employ.

For instance, if you have developed a five-year financial model and realised that the current revenue and business metrics are insufficient to achieve your desired valuation, you can explore additional ideas such as introducing a new product or service, adding new business models, different marketing channels, and so on. This approach will refine your business strategy, help you envision how rapidly you must increase your fundamental metrics and pave the way for the realisation of your dream company valuation.

As I mentioned at the beginning, it is crucial to evaluate your company when attracting investment. Particularly for startups in the early stages or during the growth process, achieving a high score is important. Before entering into an agreement, potential investors conduct a comprehensive Due diligence examination of the company. This process includes evaluating financial and legal documentation, business model, state of development, assessing the product's market compliance and the competence of founders and key figures of a startup. The status of these elements significantly influences the overall valuation of the company. In a positive scenario, it confirms its reliability and growth potential, ultimately leading to more favourable terms in the transaction.

Right evaluation also allows you to determine the amount of capital you need to attract at each stage in order to attain your objectives. For that I recommend, using your vision of the projected figures to conduct a reverse analysis. For instance, if you aim to sell Series C at a particular price, you can calculate the amount of money you need to attract at Series B, A, seed, and pre-seed. And then compare the goals to actual numbers as the company grows. Furthermore, this segmentation into stages allows you to plan the proportion of shares you can afford to give away at every step.

Then, of course, it is possible and usually necessary to slightly adjust the strategy if something does not go as planned. For example, you have surpassed the pre-seed and seed stages and completed your objectives. However, in Series A, you did nоt manage to raise the necessary amount. Consequently, you need to recalculate your expectations for Series B, C, and so on, so the final outcome aligns with your desired company valuation.

Such planning and comprehension of each step not only give a more precise estimation but also reduce the stress for the founders. They often strive to maximise the value of their company and sell it overpriced. However, an unrealistic valuation can shake the company's image, lead to some investment challenges, financial strain and missed opportunities, such as strategic partnerships or M&А (mergers and acquisitions). Therefore, every valuation at every stage must be supported by analytical data. That helps to see the situation clearer and persuade the investors, so they will believe in the dream valuation too and support the startup in achieving it.

Risk Management Regarding Company's Value

There are a huge number of potential risks that include external factors such as global economic and financial crises, internal risks like changes in the specific market and the emergence of strong competitors, and certain company-specific risks, for example unconfirmed business hypotheses or the failure of marketing strategies.

To address these challenges, I recommend relying on financial modelling and the calculation of key indicators year after year. This lets you anticipate potential risks and identify alternative pathways that can lead to the desired business outcomes and valuation. While it is not possible to directly influence the valuation itself, you can focus on optimising the metrics that contribute to achieving our dream company’s value.