Conformity Research Paper

Conformity

Conformity is a valuation that only focuses on the investor preferences. In short, the investor has certain investment preferences and these will be used to find the startups that ‘conform’ to these ideals.

Now, what does this mean?

If you were an investor wanting to invest around $100,000 to $250,000 in a startup and as a result gain around 10% in equity, you’d find ventures that conform to these rules while providing you with the specific exit strategy you might have.

In terms of your startup valuation, you might encounter an investor who wants to invest $120,000 for 7% equity of the post-money equity. The implied valuation here would make the company valued at around $1,7 million.

While this is not necessarily that helpful

The approach is the least scientific method of the seven, if I may say. This is down to it being more about what the investor is comfortable with rather than what the startup is actually worth.

Essentially, it’s not so much about considering startups on individual basis, but finding those that conform to the investor’s ideals.

Cash flow

Now, startup valuation can also be derived from specific cash flow calculations.

The idea with this approach is to consider the startup as the ownership of any other investment vehicle, such as real estate.

You examine the money the startup would earn once the expenses are taken away from its revenue – as in your typical cash flow calculation.

In order to make these calculations, your business must also consider discounted cash flow.

ADD IMAGIN OF DCF

You might have noticed a dilemma here.

How does a startup use cash flow, when the financial history of earnings and expenses is not yet established?

Perhaps more importantly, how to use the method when your startup is most likely losing money rather than making it?

You’d be right – the method is not useful for startups with any sort of financial

At its core, it would take around 2,000 hours of labour to rebuild it. The cost of the startup would simply be the cost of those 2,000 hours of labour.

Therefore, you can use the reconstruction model even when you don’t have intangible assets.

Combination

Intuitively, startup valuation can’t just rely on a single method, right?

Since the data you are working with is limited, it makes sense to consider different elements of the startup together.

Now, this is exactly what the combination method.

The method is also known as the Berkus Method. It takes the perceived value of different elements of the startup together to come up with the present value.

You can listen the model’s originator talk about it here:

ADD YOUTUBE

In essence, you are evaluating the possible value of the startup by considering what others might be able to make if they owned the individual elements.

For example, your software startup would be value based on the inherent value another business might have acquiring the business.

You would consider the financial gain your software might provide to an existing technology firm operating in the industry.

Competitive