Financing and valuation of early stage startups

Startups, defined as innovative enterprises with the potential for rapid growth, are gaining in importance in national economies. Startups have made their mark in many sectors in recent years, and can rapidly increase in scale and transform into giant businesses operating in the global markets. With this in mind, Turkey, like many other countries, is aiming to increase the number of start-ups in the country, and to support those with the ability to achieve global success. One of the main determinants of the success of a startup is access to funding. Early stage startups in particular, due to their limited or lack of borrowing capacity, seek funding from angel investors or venture capital firms to increase their capital, in contrast to what is predicted by the theory of hierarchy of funding. This highlights the importance of making accurate valuations of startups. Due to reasons that are specific to startups, conventional valuation methods are of little use in their valuation, particularly those in the early stages of establishment, and so selecting alternative valuation methods that are a better fit for the purpose is important for all parties involved. After discussing the current funding methods and investment stages for startups, the present study identifies five different company evaluation approaches, and applies them to three early stage startups operating in different sectors. The valuations obtained through these methods were then compared with those decided upon by the investor and the entrepreneur during their investment discussions. The company valuations obtained using the five different methods of alternative valuation were found to be more accurate than those obtained using conventional methods, leading to the conclusion that alternative methods can be used for the more accurate valuation of early stage startups.