The science of valuing startups

from Dan Gray

“It’s more art than science.”

You’ve probably heard this phrase most often in connection with cooking, from a friend or relative, explaining your mixed results with a specific recipe. The bottom line is that precision and calculation are less important than sensation and intuition.

The same logic is often applied when evaluating at an early stage at startup. Forecasts are unreliable, the roadmap contains key assumptions, and the founding team is yet to be tested. Investors will speak in vague terms about valuation at this stage, which is often a combination of elementary Excel and “intuitive feeling.”

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The interesting thing about the analogy of cooking is that the more you rise in your abilities, the less true. Any chef worth the salt can tell you about Mayard’s reaction, the role of leavening agents and protein bonding, or even the angle of radial slices to get even onion segments.

Just because a process is good does not mean that the methodology is unscientific.

The same can be said for startup evaluation, especially in the early stages, where the focus is on quality data.

Potential and ambition

There are two sides to evaluating a startup: potential and ambition.

Start-up potential is measured by qualitative methodologies, such as a scorecard and checklist. They look at everything from the founders themselves to the strength of their IP and the market in which they operate.

Consultant Dan Gray

What is the growth rate of the industry? What is the survival rate of start-ups in the region? They give you an idea of ​​the theoretical capacity of the startup, which is crucial because talking to investors about expectations for the future means first agreeing on the present.

The second step is to measure the startup’s ambition with quantitative methodologies focused on revenue forecasting, such as discounted cash flow. You focus on what the founding team aims to achieve – instead of capacity – which is important for two main reasons:

  1. Not everyone wants to build a unicorn in five years. Some startups have the potential for such a scale if money is thrown into growth, but not every good team wants that future. Many are looking for steady growth in a niche market, less dilution and a more predictable future.
  2. Some founders believe they can build a unicorn, but all they have are horse parts. If the forecasts show $ 300 million in ARR in four years, does that match the growth of the industry? Can they win in a competitive market without IP advantage or gain trust in a technical market without experienced founders?

Through a rigorous methodological approach to both qualitative and quantitative data, you can reconcile the potential and ambition of start-ups to reach an assessment. This kind of process, done correctly, also has the advantage of eliminating the many biases that too easily creep into these decisions under the guise of a “sixth sense.”

Later stages

At later stages, the focus shifts from qualitative to quantitative measures. Instead of “potential and ambition”, both sides of the evaluation can be seen as “assets and expectations”.

Think of evaluation as baking: If you are trying to produce the best slice of bread on the market, you need to make sure that your ingredients are of the best quality and your technique and time are accurate. One is qualitative, the other is quantitative. With the right approach, both are scientific. Most importantly, they are reproducible, reliable and reasonable.


Dan Gray is a consultant working with start-ups in fintech and Web3, and marketing manager in Equidamstart-up appraisal platform.

Illustration: Guzman House

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