Fynsa
In recent years, the term “startup” has become very popular around the world "startup," which refers to an organization that develops highly innovative products or services that are in high demand in the market, usually with a strong technological foundation and expected to experience exponential sales growth.
In this context, we have seen how many of these companies have secured large rounds of funding, including notable Chilean examples such as NotCo, Cornershop, Betterfly, Xepelin, and Migrante, in exchange for a certain percentage of ownership in these companies. But how is the price of this transaction determined? Is the same financial analysis used as for traditional investments?
The answer isn't as simple as a yes or no. Although there are many traditional valuation methodologies, these approaches are often insufficient to properly carry out this task for this type of company, since many of them are in an early stage where they do not yet generate positive cash flows or their cash flows are highly unpredictable, which can result in a distorted valuation that is far from reality.
Even so, there are ways to adopt these models: for example, the classic “Discounted Cash Flow” ” successfully reflects long-term value and captures high growth ratesby determining appropriate WACC (Weighted Average Cost of Capital) figures for the industry in which the startup operates and using perpetual growth rates.
Similarly, it is important to take into account various non-financial indicators that can be useful in complementing this exercise, as they allow for measuring a company’s performance in comparison to established companies in the sector. Some examples of these include: the number of subscribed customers, the frequency of visits to the platform, the customer acquisition cost, or the customer retention rate. POn the other hand, simple multiples can be applied to the amount of money transacted through the platform in the case of a marketplace, or a multiple based on revenue. The key is to make a comparison based on the same parameters for companies operating in the same industries, ensuring that these parameters are key performance indicators in those areas.
Failure to include these factors or adjustments in “traditional” models can lead to complexities and errors in the valuation of these companies, since such models would fail to reflect the higher proportion of costs incurred in the early stages relative to the revenue generated, nor would they account for changes in that proportion over time or the revenue growth that could result from potential expansion into new markets, or even from increased adoption of the product in its current market.
Therefore, properly valuing a startup is essential for measuring the company’s realistic growth, which is why it is crucial to conduct an analysis that includes factors other than the “traditional” ones, in order to accurately reflect long-term value and capture the company’s expected future growth.
