What is the Cost-to-Duplicate Startup Valuation Method?
What is it?
Quite straightforward, the Cost-to-Duplicate approach to value startups focuses on the costs & expenses that took to create the startup. It measures how much it would cost to recreate the company from scratch. The idea behind it is that a potential investor wouldn't allow a higher valuation than the aggregate sum of the expenses that took the company to get to that point.
This is quite straightforward to calculate for physical companies, and for online-based SaaS-type businesses the final figure could be worked out as the overall cost of development poured into making the software.
There are a couple issues with this approach: first, it fails to take into account future sales of the company, Last at most importantly, it ignores intangible assets, which arguably constitute the real lever into the potential success of a startup.
By overlooking intangible assets such as industry reputation, B2B partnerships brand recognition, human capital (knowledge or experience), and intellectual property (trade secrets, trademarks, patents, copyrights, etc.), the Cost-to-Duplicate approach may feel quite unreliable.
For deep-tech startups with very niche products and highly dependant on a specialised team of PhD's it might be a solid take. However, a common scenario is a startup with an MVP in an almost-saturated market that does the thing every other similar project does but with a slight touch that differentiates it from the others. The MVP was relatively cheap to build but the project's potential is not reflected in the valuation. A possible solution would be to combine this method with some other qualitative ones like Berkus or Scorecard.
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