Financial valuation of companies: It is a set of quantitative and qualitative, scientific and practical procedures aimed at reaching the fair value of the company.

Determinants of the financial evaluation process :

Financial assessments are only valid for a specific period from their issuance date due to changing market conditions and the startup’s own development. The figures presented in the assessment may vary from one entity to another depending on differences in years of experience and the assumptions upon which the assessment is based. Financial assessment itself presents a significant challenge for startups for several reasons:

1. There is no single, universally accepted theory or method for evaluating startups.
2. Startups cannot be evaluated in the same way as other traditional companies or projects.
3. Startup companies’ assets are often only intangible assets.
4. The inability to predict or be certain of a startup’s ability to succeed and generate profits in the future.
5. The goals and directions of startups may change as they go through different stages of growth.

Financial calendar for startups:

Startups are generally evaluated according to several methods and depending on the stage the company has reached, whether it is the pre-revenue stage or the post-revenue stage, and each method has its drawbacks and advantages:

The startup is still in the pre-revenue stage:

The following methods apply to startups that have not yet generated actual revenue, i.e., have not yet proven their commercial success and are still in the idea or development stage:

Comparable Transactions Method:

This method involves searching for previous acquisitions or valuations of similar startups within the same geographic area. The market value of these previous acquisitions is then compared to that of the startup under evaluation to arrive at a suitable market value.

However, the most significant drawback or disadvantage of this method is the possibility that there are no similar deals that have taken place previously, in addition to the difference in the circumstances, standards and considerations of the previous evaluation.

Cost-to-Duplicate Approach: Method for creating an alternative.

This method allows the investor to estimate the cost of establishing a startup similar to the one being considered for investment, taking into account development efforts, challenges, and the time required to reach the current stage. The resulting estimated cost then becomes the startup’s market value.

However, this method also has drawbacks, namely that it does not take into account the value of the startup idea itself, or the value of the company’s development team and their skills and capabilities accurately.

The Berkus Method:

This method adopted 5 qualitative criteria that qualify for evaluating any emerging investment, which are:

1. The idea (Sound Idea).
2. Product Prototype.
3. Quality Team Capabilities.
4. Quality Board.
5. Initial Sales.

Each of these factors is given a fair value not exceeding $500,000 per factor, with a maximum total value of $2,500,000 for any emerging investment according to this method. This method is considered one of the most successful methods for evaluating emerging investments.

The startup company after it started generating revenue:

After the startup succeeds in generating revenue, its evaluation becomes clear and somewhat easy, as it has proven the success of the idea and the launch of the project.

After a startup generates revenue, it is evaluated according to traditional business valuation methods, which are:

• Discounted Cash Flow Method
• Book value method
• Revenue Multiplier Method

Startup funding rounds:

Startups, like other companies, need financial evaluation during their development stages and to finance their various activities, with the aim of development, operation, growth and expansion.

To secure funding, startups make significant efforts to raise the necessary capital through funding rounds. These funding rounds vary in type and name depending on the startup’s stage of development and its specific funding objective.

However, most startup funding rounds take the following form:

• Pre-Seed: At this stage, the startup is still just an idea, a feasibility study, and a business plan.
• Seed Funding: This usually represents the first official funding round to start working on developing and creating the project’s products.
• The first investment round, Series A: This is usually for the purpose of expansion and growth of the company, and during this round a profitable business model is presented.
• The second investment round, Series B, includes funding for research and development, analysis, and marketing after the startup has successfully broken into the primary market.
• The third investment round, Series C: Similar to previous rounds, except that it focuses on entering new markets.

Therefore, the market value of the startup is determined at each stage of funding, in order to determine the required funding ratio of the startup’s total value.

Summary:

• Financial assessment for startups is a necessity and a requirement with every funding round.
• Financial valuation requires expertise and a high level of knowledge of various valuation theories.
• The evaluation method varies depending on the stage the startup has reached.
• Financial valuation results may differ among experts even if they follow the same theory and tools.