Startup valuation has gained importance with increasing IPO activity, especially among Indian tech startups. The Price of Recent Investment (PORI) often serves as a benchmark for valuation but may not always reflect ordinary equity value due to additional rights provided to investors.

Valuation challenges arise due to unreliable future projections and the absence of free cash flows in early-stage startups. The probability of success is a critical factor; studies show only 10% of startups succeed.

Start-Ups can be broadly classified into two categories:

1. Revenue Generating Start-Ups

There is a proof of concept and of the product’s ability to generate revenue. These start-ups may not be profit making however their ability to generate revenue makes them less riskier than the pre revenue stage companies.

Valuation Methods for Revenue Generating Startups- Discounted Cash Flow (DCF) is preferred with a longer forecast period. Growth is tied to Return on Capital (ROC) and Reinvestment Rate (RIR). Terminal Value accounts for 60-80% of total valuation. Discount-rate reflects target return for investors. Corroboration using the market approach is recommended.

• Pre Revenue Start Ups

It becomes more complex as actual revenue numbers are not available and thus proof of concept is not established. Apart from traditional valuation methods, some of the other commonly used Valuation methods by Investors to value pre revenue start-ups are:

Valuation Methods for Pre-Revenue Startups-

Method 1: Berkus Method

Method 2: Venture Capital (VC) Method

Method 3: Cost to Duplicate (CTD) Method

India has produced 44 unicorns worth $106 billion in the last decade, with IPO interest from companies like Zomato, Flipkart, and Nykaa. Right valuation practices are crucial to sustaining long-term success in the startup ecosystem.