Uber’s latest funding round values the San Francisco ride-service company at $40 billion, making it one of the world’s most valuable startups.
So how is a company valued? Company valuations are more of an art than a science and there are many methods to value a company. For example, if a company has been established for a while, it is more straight-forward. You can use the enterprise value method, if the company has shares, which is market capitalization + debt, minority interest and preferred shares – total cash and cash equivalents. Another is the comparables method, which like when buying/selling a house, uses comparable businesses to gauge the value of your business.
But what if it’s a startup without established revenue streams? You see it on Shark Tank all the time, someone asking for $X amount for Y% of the company. If the entrepreneur is asking for $100k for 10% of the company, s/he valued his/er company at $1M. Is that an acceptable method of valuation? Kind of. Startups can tell the market what they are worth. If the market believes the startup, it will pay that much. If it does not, then the market believes the startup is “over-valued.” Sharks will offer a small amount for a large % of a company, effectively reducing the value (not worth) of the company. Another method is the discounted cash flow method, which uses the present value amounts of projected future revenues. Obviously, a startup generally does not have established revenues so it is difficult to project future revenues.
This is why valuation is an art and the market takes time to find a price for a business, like how share prices settle at a certain point after an IPO.