How can a startup be worth several million just a few months after being founded? The entrepreneurs Nikita Fahreholz and Martin Eyerer explain what methods and criteria there are for evaluations.
According to its own information, Trade Republic recently cracked the valuation of twelve billion euros. Parloa became a unicorn in May last year, which means it has a valuation of one billion euros – and is now said to be worth three billion euros.
Where do such reviews come from? How can it be that a startup is worth several million just a few months after it was founded? Talk about exactly that Nikita Fahrenholz (Founder of Delivery Hero & Fahrengold) and Martin Eyerer (Ex-CEO Factory Berlin, entrepreneur, techno DJ) in ours Podcast Royal GS (a new episode every Thursday).
Assessment methods
According to Fahrengold, the company valuation of startups depends on three different factors from: the Industrythe Return expectation from investors and KPIsthat you can show – for example sales, user numbers and research successes. However: “Each startup category, depending on the business model, actually has its own evaluation methods,” says Fahrenholz. “If there are real sales later and these sales are a little larger, then it is usually the case that an industry standard is used.”
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However, according to Fahrengold and Eyerer, there are examples of how startups can arrive at an evaluation. One method is this Multiple rating: If you know the sales and valuation of a comparable startup, you can compare them by dividing the company value by the sales. The number that comes out is the multiple and can be transferred to your own startup. However, this is more of a quick calculation.
Another way to measure the value of a startup is ARR multiple (Annual Recurring Revenue) i.e. the annual recurring revenue. The ARR is currently a popular flex among software startups, especially on Linkedin. According to Eyerer, software startups have an advantage here, namely planning security. “If you sell software with licenses, then you know how long on average do customers stay on the platform? How much do they pay per month? Then you get a higher multiple on sales,” he says.
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Fahrenholz also says that startup valuations in the early stage area can sometimes be like “at a bazaar”. Ergo: They are a matter for negotiation. Fahrenholz himself once had a company that was worth 25 million euros – and that with no finished product and no sales, as he explains in the podcast.
Disadvantage of high ratings
High early-stage valuations bring both advantages and disadvantages to founders. According to Fahrenholz, one disadvantage is that investors’ expectations for the startup’s growth and value are very high. Both are expected to increase many times over.
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“This means that startups are sometimes in such a mess that they have to concentrate fully on raising money in order to increase their valuation, so to speak, in order to generate new sales with the money,” says Fahrenholz. “And as a founder you have less and less of a stake in the company and of course you always have to step up and achieve a higher valuation.”
Eyerer makes another point: If a founder achieves a high valuation early on and raises several million, it does not automatically mean that he is rich. According to Eyerer, a founder is “only a millionaire on paper because he still has his secondaries, which he is not allowed to sell at the beginning.”
