M&A and Corporate Advisory Director at RSM Poland

Startups have their peculiarities that cause quite a lot of problems whenever there is a transaction or a planned investment on the horizon. Firstly, these businesses do not have any history, or any impressive financial results, which is clearly due to the fact that they have a short market presence. Their financial result is often negative. Therefore, from the investors’ perspective, startups mean high risk and low liquidity. What is also important is the fact that many startups simply go bust within 2-5 years after being established.

As a result, startup valuation is quite a challenge. In practice, it is actually impossible to apply any asset-based or comparative methods for startup valuation. This means that only profit-based methods can be used. Hence, when determining startup value, it is a good idea to consider the following methods:

  • Venture Capital Method (VCM)
  • Pre-money and post-money valuation (PMV)
  • First Chicago Method (FCM)


As we all know, in the investors’ perspective, in the life cycle of a project there is a certain point in the future when they will want to leave the project. This holds true for startups as well, obviously. Investors always aim to achieve a return being a certain multiplicity of the invested amount or obtain a certain internal rate of return on the basis of the risk involved in a given project. VCM reflects this understanding and employs relevant time frames to discount the future value of the company. What is more, VCM takes into account what is startup-specific, i.e. generating negative cash flows or the uncertainty of generating positive cash flows. For the purpose of VCM, you calculate free future cash flows, where residual value is calculated with the P/E ratio estimated for a given industry (e.g. based on comparable listed companies). The calculated residual value is then discounted to the present value. What should be added is that discount rates used for VCM are usually high, due to the fact that they are supposed to reflect high business risk involved in startups.

This is how you determine pre-money valuation. After adding the invested capital, you obtain post-money valuation.

Thinking about acquiring or selling a company, legally, risk-free and with profit?


Post-money valuation assumes that the company is financed to unlock its full business potential. It is important that PMV is applied only to entities that are already operating and this is preceded by pre-money valuation. To give you some idea of this, if the pre-money valuation was PLN 2 million, and the investor is planning to invest PLN 0.5 million, they should receive a 20% share in the company. Clearly, such calculations are by no means rigid guidelines you must stick to at all cost. It would be better to treat them as a starting point for any further negotiations.


FCM is a hybrid approach that relies on multipliers for measuring the terminal value, and discounts future cash flows in order to obtain a present valuation. In this method, you have to create three forecasted scenarios of business development based on future business results. The ”best case” scenario assumes that results will be above most expectations. The ”mid case” or “base case” scenario assumes relatively stable operations. And finally, the “worst case” scenario assumes a breakdown in the company’s business model.

The calculation of the company’s value begins with forecasting its future cash flows in the three above scenarios. And even though future cash flows are highly speculative, using the values of three scenarios in the calculations allows you to consider the risks involved in each of them. What is important, the calculation of cash flows covers a period until the expected exit-horizon. For most startups, the forecasting period usually covers three to seven years

For each scenario, a residual value is being calculated as a value based on the business value multiplier in the final year of the financial forecast (this is most often a multiplier based on EBITDA), i.e. the Exit Price. Withdrawing the equity with a bonus expected by investors may take different forms. The business value for each scenario is a total of the discounted cash flows in the period of the financial forecast (i.e. the present value of future cash flows) and the discounted residual value (terminal value). The result of every valuation scenario is then multiplied by pre-defined weighs equal to the probability of the occurrence of this scenario. Thus, the final valuation is the weighted average of the results of different scenarios.

Which valuation model will best protect both the investor and the startup itself? It is a good idea to ask a professional advisor about this. At RSM Poland, we perform business valuations, relying on reliable methods that are popular and approved. See the details of our offer and contact us.

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