[Analysis] Valuation of Startups – Definition | Life Cycle | Valuation Methods

  • Blog|Income Tax|
  • 7 Min Read
  • By Taxmann
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  • Last Updated on 28 February, 2024

Valuation of Startups

Table of Contents

  1. What’s a Start-up
  2. What’s typical about startups while valuation?
  3. Life cycle stage of the company
  4. Why do most startups fail?
  5. Developing company life cycle
  6. Valuation methods across stages of startups
  7. How early-stage companies get their valuations
  8. Assigning premiums in valuation
  9. Venture Capital Method of Valuation
  10. Other Methods of Valuation
  11. Valuing using Operating Value Drivers
  12. Example – Valuing Pre-Revenue Company
  13. DCF Calculations
  14. Example – Valuation using transaction multiples
  15. Case – ZOMATO

1. What’s a Start-up

An entity shall be considered as a Startup:

  • Up to 10 years from incorporation
  • Private company or Partnership or LLP
  • Turnover less than INR 100 crore (in any year)
  • Working towards innovation, development or improvement of products or processes or services, or
  • A scalable business model with a high potential of employment generation or wealth creation.

Ministry of commerce and industry (Department of Industrial Policy and Promotion)

SEBI has adopted the same definition under AIF regulations

Income Tax Department is using the same definition for tax breaks.

That’s only legal definition for getting tax breaks.

Any company that’s constantly innovating/pivoting is practically a start-up … not just any new company that’s doing something different

2. What’s typical about startups while valuation?

  • Stage in life cycle: young and less mature, fewer employees, lower assets, minimal capital.
  • Size: Smaller size; higher levels of risk; limited access to capital markets [calls for a small size discount (premium while calculating discount rate) when compared with public companies].
  • Overlap in shareholder and management: Shareholders are the management; less agency problem.
  • Quality of financial information: Lack of reliable data; lower history; discretionary spends; questionable financial reporting; focus on reducing taxes.

3. Life cycle stage of the company

  • Early stage: A company in the earliest stages of development should be valued using the asset-based approach as future cash flows might be too unpredictable and there is no guarantee that the company will be able to operate as a going concern for the foreseeable future.
  • Have established product-market fit (PMF): A company that has successfully negotiated the early development stage and is witnessing high growth should be valued using the income approach.
  • Matured startups: A stable, relatively mature company should be valued using the market approach or Income approach.

4. Why do most startups fail?

  1. Lack of Persistence Quitting too early
  2. Poor corporate governance
  3. Running out of money or resources
  4. Underestimating competition
  5. Too slow on pick up, Late execution, Fear of taking risks
  6. Not adaptable to market needs

Get a Story and estimate the climax

Every valuation is based on a story. Don’t fall for VFXs

Don’t hide behind management forecasts. You still own the value you report.

Get a Story and estimate the climax

5. Developing company life cycle

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6
Product revenue None None None Some growing Established history
Expense History Limited Substantive Substantive Substantive Established history Established history
Profitability Loss Loss Loss Loss Breakeven/profitable Established history
Management Team Incomplete Expanding Complete Complete Complete Complete

Product Development

Limited Underway Beta Testing Order fulfilment Order fulfilment Ongoing
Financing Sources Angels/Early VC VC VC/Strategic Mez fin/strategics Strategic/IPO

Self Funding/ Debt + Equity

6. Valuation methods across stages of startups

stages of startups


Focus on

stages of startups

stages of startups

7. How early-stage companies get their valuations

Story: Most investors bet on the founders and their business story. No one knows the future and thus, valuation is often difficult and always wrong.

Negotiation: During early stages, funds are raised based on negotiation [the early-stage version of demand and supply] and thus, startups are “priced” not “valued”.

8. Assigning premiums in valuation

Assigning premiums in valuation

9. Venture Capital Method of Valuation

Step 1: Estimate the expected earnings or revenues in a future year.

Step 2: Multiply the earnings in the future year by the multiples of earnings.

𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 ℎ𝑜𝑟𝑖𝑧𝑜𝑛
= 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠𝑦𝑒𝑎𝑟 𝑛 ∗ 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡𝑒𝑑 𝑃𝐸

Step 3: The estimated value is discounted back at the target rate of return.

𝐸𝑞𝑢𝑖𝑡𝑦 𝑉𝑎𝑙𝑢𝑒 𝑡𝑜𝑑𝑎𝑦 = 𝐸𝑞𝑢𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 ℎ𝑜𝑟𝑖𝑧𝑜𝑛 (𝑛) / 1 + 𝑇𝑎𝑟𝑔𝑒𝑡 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛

9.1 Valuation methods

Market Approach

  • Multiples
  • Industry valuation benchmarks – useful as a sanity check of values
  • Available market prices

Income Approach

  • Discounted Cash Flow Method

Replacement Cost Approach

  • Net Assets

9.2 VC Return Expectations

The rates of return expected by Venture Capitalists for companies in different stages of financing as described in the two publications identified in the American Institute of Certified Public Accountants (AICPA).

Stage of Development Plummer Scherlis and Sahlman
Start Up 50% – 70% 50% – 70%
First Stage or ‘Early Development 40% – 60% 40% – 60%
Second Stage or ‘Expansion 35% – 50% 30% – 50%
Bridge/IPO 25% – 35% 20% – 35%
  1. Plummer, James, QED Report on Venture Capital Financial Analysis
  2. Scherlis, Daniel R. and William Sahlman, “A Method for Valuing High, Risk, Long Term, Investments: The Venture Capital Method,” Harvard Business School

A young EdTech company Om Ltd is expected to go public in 10 years from now. The valuer expects that the net profits of the company 10 years from now will be INR 95 crores.

Average PE Multiple of publicly traded EdTech companies is 20. Om Ltd is evaluating fund raising from investors. Investors are expecting 45 percent from the investment until the company goes public.


Exit Value = 95 x 20 = INR 1900 Crore

Value of the company today = 1900/1.45^10 = INR 46.25 Cr

10. Other Methods of Valuation

10.1 Berkus Method

Key success factors Add to company value up to:
Sound Idea (basic value) USD ½ million
Prototype (reducing technology risk) USD ½ million
Quality Management team (reducing execution risk) USD ½ million
Strategic Relationships (reducing market risk) USD ½ million
Product Rollout USD ½ million

10.2 First Chicago Method

  • Projecting future cash flows:
  • Projecting Terminal Value:
  • Discounting back future cash flows and terminal value:
  • Calculating present value of the firm:

11. Valuing using Operating Value Drivers

Valuing Flipkart
Amazon = Market Capitalisation
Number of Users on Amazon.
Value Driver: Value per user (ValuePU) = Market Cap / No. of users.

Flipkart Value = Number of users (given by Flipkart) x ValuePU
Adjustment for:

  • Marketability [Listed vs Unlisted]
  • Country specific growth factors – US Growth vs India growth
  • Global presence
  • Product diversification
  • Currency differences
    Alternatively, Ecommerce companies were valued based GMV Multiple.

12. Example – Valuing Pre-Revenue Company

Year 2014, Valuation of a Text Messaging App ChatApp with 1.6 million users. The company does not report any revenues.

Value as per Comparable Transactions Method Amount
Enterprise Value of WhatsApp (USD) as part of acquisition 19,000,000,000
Value of acquired users 2,026,000,000
Daily Active Users of WhatsApp 450,000,000
Value per Daily Active User (USD) 4.50
Exchange Rate 70.00
Value per Daily Active User (INR) 338
Less: Adjustment for Size (50%) 169
Adjusted value per Daily Active User (A) 169
Daily Active Users of CHATAPP (B) 16,00,000
Value of CHATAPP (A) x (B) 27.04 Cr

13. DCF Calculations

OmCom Pvt Ltd
Growth rate for next 5 years 18.00%
Terminal Growth Rate 6.00%
Cost of Equity 16.50%
Additional Risk premium 4.50%
WACC/Discount Rate 21.00%
Since no Debt. Thus Cost of Equity is same as WACC
FCFF (Amount in INR ‘000) 0
2019 A
2020 E
2021 E
2022 E
2023 E
2024 E
5 (Terminal)
2024 E
Revenue 353,066.94 To be estimated for each year
PAT 32,280.48 To be estimated for each year
Add: Depreciation and Non-Cash Expenses 14,922.11 To be estimated for each year
Less: Capital Expenditure 15,810.47 To be estimated for each year
Less: Changes in Non-Cash Working Capital (12,723.52) To be estimated for each year
Add: Interest (1 – tax rate) To be estimated for each year
Free Cash Flow to the Firm (FCFF) 44,115.64 49,850.67 56,331.26 63,654.32 71,929.39 81,280.21
Terminal Cash Flows 574,380.13
PV of Cash Flows 41,198.90 38,475.01 35,931.21 33,555.59 31,337.04 221,448.40
Value of the Firm 401,946.15
Less: Value of Debt 0.00
Add: Cash 48,90.56
Value of Equity (Operating Assets) 406,836.72
Less: Discount for KMP 14,200.00 The director will resign after takeover; value attributed to such director
Add: Investment Property 54,000.00
Value of Equity 446,636.72
No. of Shares (‘000) 1,319.69
Value per Share (INR) 338.44

14. Example – Valuation using transaction multiples

Transaction date Target Co. EV (INR Cr) Revenue (INR Cr) EV/Revenue
Jun-23 A Ltd 225.0 25.5 8.8x
Feb-22 B Ltd 182.5 23.5 7.8x
Jul-23 C Ltd 65.5 9.1 7.2x
Apr-22 D Ltd 125.0 12.0 10.4x
Average 8.6x
Add: Size factor 10%
Add: Brand factor -5%
Add: higher growth factor 5%
Adjustment 10% 0.9
Concluded EV/Revenue Multiple 9.4x
Revenue (INR Cr) 15.5
Enterprise Value (INR Cr) 145.79

15. Case – ZOMATO



Key Business and Revenue Model Revenue Drivers and Cost drivers
Food Delivery
(Transaction-based advertising)
No. of Monthly transacting users
Order frequency
Commission Rates restaurant partners
Delivery Ads from Restaurant partners
Key Costs: Delivery Cost, Discounts and marketing spends
Dining (Advertising) No. of Monthly Average Users Delivery Ads from Restaurant partners
Key Costs: Sales team
Hyperpure (Transaction based) No. of Restaurant partners Order Frequency
Value of supplies per order
Key Costs: Cost of goods sold
Zomato pro (Subscription) Membership Fees No. of pro members
Key Costs: Marketing
Key performance indicators
No. of food delivery Restaurants Up from 148K in 2021 to 210K in 2023.
Average Monthly users Up from 6.8 mn in 2021 to 17 mn in 2023

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