Introduction
Amid a funding frenzy during the pandemic, startup valuation—which determines the value of a business’s tangible and intangible assets—reached astounding heights. Investors, however, think that this year’s funding winter served as a purging time, driving prices down to more reasonable forecasts.
Because of funding trends and an increase in M&A transactions in the ecosystem, valuations have gained attention with the rapid expansion of tech firms. Industry figures show that 2021 was a fantastic year for the Indian startup ecosystem, with 46 new members joining the exclusive unicorn club. Nonetheless, rumours indicate that more than 20 unicorns have been added this year, despite the funding winter and cleansing time.
The startup ecosystem had unpredictable values, expanding and decreasing based on fundraising trends, amid exceptional economic conditions.
So, how can angel investors have a reliable system for assessing business valuation?
The top five things to think about when choosing a fair valuation are listed below.
Understanding the Target Addressable Market (TAM)
The Total Addressable Market (TAM) demonstrates the potential market size for each company. Even though a single company is unlikely to hold a 100 per cent market share, understanding the TAM can help investors gauge the size at which a company can scale and earn income. It is, in essence, a snapshot of the potential of the entire market. Hence, a smaller total addressable market (TAM) has less growth potential, whereas a higher TAM has larger growth potential.
For instance, in 2020, the total addressable market for direct-to-consumer (D2C) brands in India was estimated to be worth $33.1 billion. The industry is anticipated to grow to $100 billion by 2025, providing D2C firms with exciting new potential for expansion.
Recognize market dynamics and rules
Investors must also be aware of the market’s characteristics, the strength of its rivals, and any restrictions that may affect how a business performs today or in the future. A startup should demonstrate its power and capacity to develop into an influential or dominant player, even though some investors think the existence of competitors validates market opportunities.
The fact that enterprises based on cryptocurrencies are tightly constrained by legislation makes them a risky investment for investors. India has long been wary of cryptocurrency businesses and has come close to outright banning them. Now, though, they are subject to a 30 per cent tax on profits from bitcoin trading.
Importance of the founding team and their background
Early on, a startup’s strengths and shortcomings may make or destroy it, and angel investors place a lot of faith in the founding team. Founders and their team who have more industry knowledge, experience, and competence can grow their businesses even more and eventually be eligible for larger valuations.
Understand the multiples valuation method
A financial instrument used to assess a company’s financial performance is the valuation multiple. To obtain an appropriate valuation, one business is simply made more comparable to another by using one financial statistic as a ratio. This approach aids in determining the fair market worth of one company and the commercial value of a startup. Also, it aids in illustrating the connection between current worth and earlier times.
Consider past rounds of funding
Startups frequently make exaggerated valuation claims to safeguard their equity. In these situations, taking into consideration prior funding rounds aids in establishing the benchmark to assess a company’s value for your investment.
