The grass is rarely greener, but it's always different

What is the Valuation by Stage Valuation Method?

What is it?

By using the Valuation-by-Stage, we grok the possible valuation of a startup by pondering the risk that is still present in the current stage of a startup. The further a company is in its development, the (theoretically) less possible disastrous outcomes are prone to materialize.

It is a "rule-of-thumb" approach that can be used by assigning a valuation range to each stage of the development of the startup.

Estimated Company Value Stage of Development
$250,000 - $500,000 Has an exciting business idea or business plan
$500,000 - $1 million Has a strong management team in place to execute on the plan
$1 million - $2 million Has a final product or technology prototype
$2 million - $5 million Has strategic alliances or partners, or signs of a customer base
$5 million and up Has clear signs of revenue growth and an obvious pathway to profitability

As the latest stage hints towards the valued company not to have enough financial data to perform a quantitative analysis and future projections, the Valuation-by-Stage method falls within the pre-money valuation methods using most qualitative analysis, much like the Scorecard, Berkus, or Cost-to-Duplicate methods.

These are figures I took from investopedia, but they personally feel a bit too high for the reality of the startups I've been seeing myself when reading about fundings in AngelList or CrunchBase, with a lean towards American startups with generally higher valuations.

Additionally, now in 2022 after the COVID pandemic and with incoming signs of a recession, investment from VCs worldwide has slightly slowed down so it's not far from reality to expect smaller valuations from now on.

Example

Now the practical bit. The last two years we have been working incessantly in our farming supply chain startup to ensure the traceability of tomatoes in Spain using blockchain technology that we've pertinently named Cryptomatoes🍅. We are using the Valuation-by-Stage method to get a figure to negotiate with potential VC investment.

The project has a sound business plan and the founding team has already one successful exit on their backs, but the technology is hard to implement and uses niche blockchain capabilities to perform so the prototype despite being close it's not quite there yet. We place the company halway through the Has a final product or technology prototype section and we assign a valuation of $1.4M.

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References

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