What is it?
In the public and profitable companies universe, the book value of an asset represents the price as purchased in the balance sheet with it’s accumulated depreciation subtracted.
In the case of a whole company, it represents the total sum of assets, tangible (machinery, real estate, materials) and intangible (patents, copyrights, brand value, network) less the liabilities (deferred tax, mortgages, bonds, debt in general).
On a personal note this method doesn’t fit exactly to be a good method for startup valuations as the calculations rely solely on quantitative methods and hard numbers. Say for example a startup that is developing software for a certain niche market. This software leverages a combination of technologies such as Machine Learning & Blockchain. The problem they solve is very concrete and the total addressable market is small, but customers are other businesses that would cut operational costs up to 20% by using this solution, so they’d be willing to pay big time for a subscription to the platform.
The total tangible assets of the startup are the computer equipment and not much else. The company doesn’t own land, buildings or machinery. The intangible assets are very hard to estimate, while the liabilities are the software operational costs, engineers’ salaries, marketing budget, etc..
On paper, and using the book value method, the valuation would be quite low, while the potential upshot of the company might be way higher than the result of this valuation.
Have fun!
References
- https://stride-co.com/blog/most-common-startup-valuation-methods/
- https://www.veristrat.com/blog-valuation/startup-valuation/
- https://ied.eu/blog/9-startup-valuation-methods-to-calculate-business-value-and-raise-funds/
- https://visible.vc/blog/startup-valuation-methods/#8.%20Book%20Value%20Method
- https://tokeportal.com/en/everything-you-need-to-know-about-startup-valuation-methods-2/
- https://www.linkedin.com/pulse/startup-valuation-methods-kaleem-ullah/