Valuation is based on certain “Key Performance Indicators” such as forward looking revenue, relative to past revenue, or number of users and the connected growth rate. A common value for a startup valuation is 5 to 8 times the forward looking revenue for the next 12 month. And since revenue would be too weak as a stand alone value there is a list of circumstances that either help to maintain the multiple or discount it. For instance is the team truly a team of brilliant people, is the market huge enough to get into 9 digit revenue levels and go international, is the marketing and market attention already compelling, is there a well grounded and research based long term vision and so forth. Very similarly a user based valuation. Even with no revenue a startup that has already 5 million users can be valued on the value of such a user base. Depending on market size and segment, a user maybe worth up to 50 cent. in that case the technical due diligence and user review is critical.
Outside Silicon Valley, valuation seems to be a magical value. Some investors work hard to push the valuation down. Others make their investment decision depending on the valuation, yet others have no idea how to deal with valuation in the first place. To overcome that situation, it is important for investors to help those who are simply less experienced.