Financial analysts can use a variety of startup valuation methods. This whitepaper examines some popular methods of valuing startups.
In the broadest sense, startups are new businesses started by entrepreneurs. The primary objective of such companies is to develop unique products or services utilizing new technologies and ideas.
The case presented is that of a start-up producing innovative dyes with a breakthrough industrial process that has very significant environmental benefits.
Two issues, in particular, had to be examined for the investor:
- Understanding the risk of industrialization and scalability of the new industrial process
- Appreciate the ease of integration of this process with more global processes in the industry in which it is to be inserted
To obtain results in less than a week, a rigorous method and very tight timing are required. The first step is to understand the basics of the technology used by the start-up.
The investigation of scientific publications and patents on the technology makes it possible to identify a certain number of hardpoints mentioned in the scientific and technical literature, which can be documented:
- Difficulties mentioned
- Proposed future work
- Patents that could be enforceable
- Limitations of other processes
This step provides initial feedback to the technical director and an opportunity to ask additional, more informed questions about the startup’s technology, patents, and risks.
The interviews, based on an interview guide, are conducted around the main risks identified during the bibliographical survey. They also focus on confirming the benefits of the technology and identifying additional risks that may be pointed out by experts.
These interviews make it possible to complete the difficult points identified in the bibliographical study, classify the technical risks to be anticipated, and confirm the benefits of the technology
Feedback and Synthesis
A final step is to provide very straightforward and transparent feedback to the Technical Director of the start-up to assess his understanding of the risks and the preventive measures implemented to manage them.
The summary of the study, therefore, focuses on the benefits, risks, and measures taken or envisaged to limit these risks
The risks are classified according to 3 levels:
- Red level: Significant risk that is not yet controlled or anticipated.
- Amber level: Significant risk but well-controlled and anticipated or moderate risk not yet controlled or anticipated.
- Green level: Moderate risk to be monitored and well-controlled