Written by: Ian Lansdell, ETFS Capital, 10 Feb 2020
How do you usually determine a company’s value?
A company’s value is the worth of the business as a whole or simply what it would cost to purchase the business today. There are multiple ways to value a company. Some focus on fundamentals, so the company’s ability to generate and grow future revenues, while others are based on comparisons to other companies, such as multiples and ratios.
At ETFS Capital, our usual method of determining a company’s value combine:
• DCF (discount cash flow models),
• Transaction comparables and
• Asset-based valuations.
However, these methods tend to work best with businesses with a history to base them on, and not so well for start-ups. For start-ups in the FinTech space, everything revolves around what’s been built – unique selling points, how they’re different, and the scale of the problems they are trying to solve. From these bases we can make assumptions about future revenues and decide how much we would be willing to pay today for future value.
Also, it’s worth remembering that the valuation process will happen at least twice, so the founder will do their own one first and then we, as the potential investor, will do our own one. Hopefully both valuations will be similar and, in our experience, if both are using robust assumptions based on high quality analysis then they will be.
If we are not confident in the founder’s assumptions, we won’t be confident in the valuation and any investment is then unlikely.
The importance of a ‘robust’ company valuation
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