The Start-up valuation refers to the estimated enterprise value of a start-up, or the value agreed as part of a financing deal. It plays a particularly important role in funding rounds, as it determines what stake investors receive in return for their capital.
Unlike established companies, young start-ups often do not yet have a long track record of turnover or profits. For this reason, investors take into account not only financial indicators but also market potential, technology and future growth prospects.
What factors influence a start-up’s valuation?
A company’s value depends on various economic and strategic factors.
The following are particularly important:
- Market potential: How big is the target market, and what growth opportunities are there?
- Business model: How does the start-up make money, and how well can the business model be scaled?
- Technology and Innovation: What competitive advantages does the solution offer?
- Founder team: What experience, skills and competences does the team bring to the table?
- Market traction: Are there already paying customers, revenue or successful pilot projects?
- Competition: How does the start-up differ from existing offerings?
- Financial planning: How are revenue, costs and capital requirements expected to develop?
The importance of individual factors varies depending on the stage the business is at. In the early start-up phase, for example, the focus is often more on the team and the business idea.
How is a company’s value determined?
There are various methods for valuing a start-up.
Common approaches include:
- Settlement proceedings: The start-up is compared with similar companies and their valuations.
- Discounted Cash Flow (DCF) method: Future cash surpluses are estimated and discounted to their present value.
- Multiplier method: Financial indicators such as turnover or profit are multiplied by an appropriate valuation factor.
- Venture capital approach: The expected enterprise value in the event of a future exit forms the basis for today’s valuation.
However, these methods do not automatically yield an objectively correct enterprise value.
Particularly in the case of young start-ups, many assumptions are based on forecasts. For this reason, the valuation is often the result of negotiations between founders and investors.
What do ‘pre-money’ and ‘post-money’ mean?
In a funding round, a distinction is made between two key valuation metrics:
- Pre-money valuation: Enterprise value immediately prior to the new round of funding.
- Post-money valuation: Enterprise value after taking into account the newly invested capital.
The simplified formula is:
Post-money valuation = Pre-money valuation + investment
Example from a funding round
A B2B tech start-up is developing software to optimise industrial production processes.
The team agrees on a pre-money valuation of 4 million euros with the investor.
The investors then invest a total of 1 million euros.
| Position | Amount |
|---|---|
| Pre-money valuation | 4.000.000 € |
| New investment | 1.000.000 € |
| Post-money valuation | 5.000.000 € |
Under a simplified equity financing arrangement, the new investors will therefore receive 20 % of the company.
€1,000,000 ÷ €5,000,000 × 100 = 20 %
The existing shareholders will then collectively hold a further 80 %.
This example assumes that there are no additional effects arising from convertible loans, share option schemes or special shareholding agreements.
Why is valuation important for start-up founders?
A company valuation affects not only the current funding round but also the future ownership structure.
It helps founders to:
- To weigh up the capital requirements and the possible ownership stakes
- To compare offers from different investors more effectively
- Understanding the implications of financing for your shares in the company
- To prepare for future funding rounds
- To present your growth strategy in a clear and comprehensible manner
However, aiming for the highest possible rating is not automatically the best solution.
This is because if a start-up subsequently fails to meet the associated growth expectations, a subsequent round of funding may be carried out at a lower valuation.
Founders should therefore take into account not only the company’s valuation but also the terms of the contract, shareholder rights and long-term funding requirements.
You can find out more about the ownership structure in the innoWerft article on the Cap Table Management.
How can innoWerft help with this?
innoWerft supports founders in further developing their business models, interpreting relevant key performance indicators and preparing for funding discussions. Through coaching and its network of investors, start-ups can test their growth assumptions and refine their funding strategy in a targeted manner.
Frequently asked questions about start-up valuation
How is the value of a start-up determined?
The valuation is based on a combination of market potential, business model, team, technology, financial metrics and future prospects. During funding rounds, the company’s valuation is often negotiated between the founders and the investors.
What is the difference between pre-money and post-money?
‘Pre-money’ refers to the company’s valuation prior to a funding round. ‘Post-money’ takes the new investment into account and, in the case of simple equity rounds, forms the basis for calculating the ownership stake.
Can a start-up be valued without any turnover?
Yes. In the early stages of a business, factors such as market potential, technology, the founding team and initial results from market validation can serve as a basis for valuation.
Does a high valuation automatically mean a successful start-up?
No. A high valuation reflects expectations and agreed financing terms. It does not guarantee future growth, profitability or a successful exit.
innoWerft is an early-stage investor and accelerator based in Walldorf, supporting start-ups before or shortly after they are founded by providing capital, coaching and access to a network of investors and businesses to foster sustainable growth.
Would you like to take your start-up to the next level and find out more about innoWerft? Apply now for the Open Pitch.