Business valuation methods for startups

Business valuation methods appropriate for startups differ from methods used to value established businesses. As startups do not have established revenue streams, a history of earnings or significant assets; their valuation process relies heavily on projections and assumptions provided by the founders. Given such projections are prone to inaccuracies and bias, startup valuation methods have a substantial focus on assessment of the probability of achieving the projected results. The most common business valuation methods used for startups under the main valuation approaches are reviewed below.

Methods under the income approach

Income approach to business valuation determines the value of a business by converting its anticipated future returns into a present single amount. Capitalisation of Future Maintainable Earnings method under this approach is widely used to value established businesses. It analyses the past performance to estimate a single measure of the future returns.

For startups, where the past performance data is scarce or non-existent, another income-approach method – the Discounted Cash Flow (DCF) – is more appropriate. It focuses on the future, discounting a stream of the business’ projected cash flows for time and risk to arrive at a present single amount representing the business value. DCF method can produce quite a precise business value estimate, assuming the projections it relies on are accurate.

Methods under the market approach

Market approach to business valuation determines the value of a business by comparing this business to similar businesses. Market-approach methods, such as Comparative Transaction method, can be applied in startup valuations. However, valuation analysts should appropriately discount market prices of businesses they compare the startup with. This is necessary to properly reflect the fact that, for startups, the business concept is yet to be executed.

Methods under the asset approach

Asset approach to business valuation determines the value of a business based on the value of its net assets. As startups do not usually have much assets, most asset-based valuations methods are not suitable in their valuations. Although, there is an exception – the Cost to Create method. This method establishes the business value by determining how much it would cost to build a similar business from scratch. It considers the tangible assets and direct costs necessary to establish a business to a breakeven level or the level that it has reached.

Rule of Thumb methods

Additionally, Rule of Thumb valuation methods play an important role in startup business valuations. This is because the traditional methods either focus on the business’ financial history – a non-existent attribute for startups, or rely on the projections – often-unverifiable presumptions prone to overestimation, underestimation, manipulation and bias. To establish a realistic pre-revenue business value estimate, venture capitalists and startup analysts developed a set of rule-of-thumb startup valuation methods. These methods analyse the startup’s quality (Scorecard Valuation method), its risk profile (Risk Factor Summation method) or the commercialisation activities progress (Berkus method).

By Julia Podgorbunskaya, CPA, Senior Business Valuer at Professional Business Valuers
last updated June 2025

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Julia@ProfessionalBusinessValuers.com.au
www.ProfessionalBusinessValuers.com.au