Is there any good method for a reliable estimate?
If we set it under a parallel different scenario, the question will be like how much are you willing to pay for a project with high risks and high returns, the answer may appear more obvious: the offer shall be at a relatively wide range. The implication is that your company has a relatively wide valuation range compared with a relatively stable and mature business.
Why is that?
In traditional valuation theory, the business value is none but the present value of future dividend payment. Later, it transforms into free cash flow concept which is the cash flow that is controllable by the shareholder. But for an early stage company, none of these can be reliably predicted. On the other hand, venture capitals are actually betting on the exit return to value the potential candidate. Under this scenario, we believe there should exist a wide range of valuation for the early stage company, and this range, is due to the widely distributed returns that shareholders are expecting to gain in the future. Here the risk, we mean the distribution of return. In other words, the distribution of return for early stage company shall be much wider and have longer tails than traditional companies. If you use a single discounted cash flow or whatever income value to represent the value the whole company is, you are also implying that you may have very high return (say 10 times of investment) and also the high possibility of low return or even lose everything.
Every investor may have different valuation for the same company, and it should be no surprise that the range of offer could be very large for these investors.
So how an early stage company shall position itself? Our advice is you better understand what the price offered by investors implies in terms of financial performance, and assess whether it is appropriate based on your understanding of your company, and then compare if the return (offered price) js greater than the risk company is dealing with. We are investing a lot of efforts in this area and have valuable experience and internally developed tools to help you with that.
