The Void In Startup Valuation For Emerging Markets

By Dan Gray

Globally, there is no standardized methodology for calculating the value of a startup. Generally, the market is robust enough—balancing capital and opportunity—that both sides of the transaction are obliged to be fair in their assessment of the deal and negotiation of the terms.

Founders in developed economies have access to capital from a variety of sources, including alternatives to traditional equity investment: government grants, academic grants, business loans, venture debt and cash-flow financing. There are a range of ways to fuel the growth of a young business, though equity fundraising remains the most apt for early-stage high-risk ventures and competition for those deals helps maintain a founder-friendly environment.

Valuation for those equity transactions remains a complex topic, but most of the time—with one method or another—a price is agreed and the market ensures that price is reasonably fair.

When the deployment of capital slows, these transactions are rebalanced at the expense of founders. There is an impact on deal terms and valuations, as we have seen recently.

In emerging economies, asset classes like venture capital are not as well developed. The pool of startup-facing investors is smaller, can extract more demanding terms from entrepreneurs, and are themselves often less experienced in dealmaking of this type. Compounding this, entrepreneurs often lack access to the range of alternative funding sources mentioned above, should equity fundraising prove challenging.

The void here is a rigorous and standardized framework for valuing startups, which can adapt to regional contexts and indicate a “fair market value” for equity in those businesses.

This would achieve a number of goals:

• Streamline the fundraising process for investors and entrepreneurs

If you search for “how to value a startup,” you’ll find about a dozen suggested methods, from cost to duplicate to revenue multiples. The most thorough approach is obviously to combine a number of methods, providing different perspectives on the question, but which? Will your prospective investors agree that you’ve gone about it the right way?

• Make startup investment more inclusive

Being able to confidently evaluate a startup investment, often without much comparable data available for emerging markets, requires more sophistication. This makes some investments less accessible to new investors, slowing down the pace of evolution in the market and limiting the available amount of capital for startups.

• Reduce personal bias in the investment process

Obvious, but worth emphasizing: The more valuation is based on a standardized process, the less there is potential for personal bias to creep into the equation. Conscious or not, both founders and investors can be found guilty of irrational influences on something as complex as evaluating a startup investment opportunity.

• Stronger long-term outcomes for ecosystems

Investors and founders are fundamentally on the same side: Both want to build great companies and create value. Valuation is one of the few areas where the two sides diverge, with competing incentives for ownership. Building the relationship on open standards, particularly when addressing points of friction, is sure to make the whole engagement more positive and enable healthier, more collaborative ecosystems.

Conclusion

There’s no reason why this proposition shouldn’t apply globally, but that’s a case to be made another day. It’s probably on a par with trying to get the world to switch to metric.

What’s clear is that standardized valuation could have significant impact in emerging markets where there are fewer well-established practices, not as much data to benchmark against, and greater competition for capital. Fair and transparent prices are the grease of well-functioning markets.

Dan Gray is a consultant working with startups in fintech and Web3, and the head of marketing at Equidam, a platform for startup valuation.

Illustration: Dom Guzman

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