How do you adjust your start-up valuation for risk and uncertainty?

1 Discounted cash flow

One of the most widely used methods to value a start-up is the discounted cash flow (DCF) approach, which estimates the present value of the future cash flows that the start-up will generate. However, the DCF method requires making assumptions about the start-up's growth rate, profitability, and terminal value, which are often uncertain and optimistic. To account for the risk and uncertainty, you need to apply a discount rate that reflects the cost of capital and the riskiness of the start-up. The higher the discount rate, the lower the valuation, and vice versa. You can use various sources to estimate the discount rate, such as the weighted average cost of capital (WACC), the capital asset pricing model (CAPM), or the industry average.

2 Scenario analysis

Another way to adjust your start-up valuation for risk and uncertainty is to use scenario analysis, which involves creating different scenarios based on different assumptions and outcomes. For example, you can create a base case, a best case, and a worst case scenario, and assign probabilities to each one. Then, you can calculate the expected value of each scenario by multiplying the probability by the valuation. Finally, you can sum up the expected values of all scenarios to get the overall valuation. Scenario analysis can help you capture the range and variability of your start-up's future performance, and identify the key drivers and sensitivities of your valuation.

3 Multiple valuation

A third method to adjust your start-up valuation for risk and uncertainty is to use multiple valuation, which compares your start-up to similar or comparable companies in your industry or market. You can use various multiples, such as revenue, earnings, or users, to estimate the value of your start-up based on the average or median value of the comparable companies. However, you need to adjust the multiples for differences in growth, profitability, risk, and stage of development between your start-up and the comparable companies. You can use various factors, such as growth rate, margin, beta, or discount for lack of marketability (DLOM), to adjust the multiples. Multiple valuation can help you benchmark your start-up against the market and validate your valuation assumptions.

4 Valuation report

Once you have adjusted your start-up valuation for risk and uncertainty, you need to communicate your valuation to different audiences, such as investors, customers, employees, or partners. You can use a valuation report to present your valuation methods, assumptions, results, and recommendations. A valuation report should include the following sections: executive summary, introduction, industry and market analysis, company overview, financial analysis, valuation methods and results, sensitivity analysis, and conclusion. A valuation report should be clear, concise, and consistent, and highlight the strengths and opportunities of your start-up.

5 Valuation pitch

Another way to communicate your start-up valuation is to use a valuation pitch, which is a short and persuasive presentation that showcases your start-up's value proposition, traction, and potential. A valuation pitch should include the following elements: problem, solution, market, product, traction, team, competition, financials, and ask. A valuation pitch should be tailored to your audience's needs and interests, and address their objections and questions. A valuation pitch should be engaging, compelling, and memorable, and demonstrate your passion and confidence in your start-up.

6 Valuation negotiation

The final step to adjust your start-up valuation for risk and uncertainty is to negotiate your valuation with your potential investors or buyers. Valuation negotiation is a dynamic and interactive process that involves bargaining, compromising, and convincing. You need to prepare well for the negotiation by researching your audience, knowing your walk-away point, and having alternatives. You also need to be flexible and creative in the negotiation by considering different deal structures, terms, and incentives. You should aim for a win-win outcome that maximizes your value and minimizes your risk.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?