Aneez Biotech Private Limited is a start-up Venture in Biotech field and expects a Private Equity investment shortly from a Venture Capital investor. In this scenario the Company has approached you to value its business.

The following are some of the generally acceptable methods of valuation of start-ups: Venture Capital (VC) method: Venture Capitalist Method is one of the globally acceptable methodologies in estimating the value of start-ups. In this method the valuation of the start-up is done from the venture capitalist point of view. It indicates the value of pre-money ventures by following the process that VCs go through, where they exit an investment within three to seven years. It estimates the expected exit price of a similar mature business venture and discounts it back to present value considering the risks involved. First Chicago Method: The First Chicago Method is one of the context specific valuation methodologies which consider payouts to the investor during the holding period. This method takes into consideration three scenarios: Success, Failure and Survival case and associate probability to each case to find the weighted average price of a start-up business. Compared to the Venture Capital Method, the First Chicago Method has conceptual advantages but is also characterized by a more complex valuation process. Adjusted discounted cash flow method: This method is the scientific tool used to judge the value of a start-up on the basis of its potential which is converted in the form of cash flow and adjusted with differential discount rates based upon the risk perception of a start-up entity. The most common problem with applying a DCF method to a start-up is that 'business stabilization' is not reached in 4-5 years (the usual forecast period). Similarly, listed business' multiples do not reflect the growth potential of a start-up. Start-ups can be valued using an extended DCF to capture their full growth, or even a two-stage DCF model that applies a formula to reflect a gradually decreasing growth. Berkus Method: According to super angel investor, Dave Berkus, the Berkus Method, 'assigns a number, a financial valuation, to each major element of risk faced by all young companies after crediting the entrepreneur the basic value for the quality and potential of the idea itself.' The Berkus Method uses both qualitative and quantitative factors to calculate a valuation based on five elements: Sound Idea (basic value) Prototype (reduces technology risk) Quality Management Team (reduces execution risk) Strategic Relationships (reduces market risk) Product Rollout or Sales (reduces production risk) Scorecard Valuation Method: It is also known as 'Bill Payne valuation method' and is one of the most preferred methodologies used by angels. This method compares the start-up (raising angel investment) to other funded start-ups modifying the average valuation based on factors such as region, market and stage. For Aneez Biotech Private Limited, a start-up in the Biotech field, the Venture Capital (VC) method or the Adjusted Discounted Cash Flow (DCF) method would be suitable. The VC method is appropriate as it considers the perspective of a venture capitalist and the exit strategy, which is relevant for a company seeking private equity investment. The Adjusted DCF method is also suitable as it can capture the growth potential of a start-up over an extended period, which is crucial for a biotech company with potentially long development cycles.