Valuation Demystified How to Evaluate a Fintech Startup's Worth

Valuation Demystified: How to Evaluate a Fintech Startup's Worth?

Introduction

With 3000+ fintech companies, India is the third-largest fintech ecosystem in the world.

Online shopping, checking bank balances, investing, and all other financial activities that used to require assistance and interaction with a financial service provider can now be performed within minutes.

All thanks to top fintech companies in India, digitizing financial activities and making them more efficient, accessible, and secure using the latest technology. 

Investors are attracted to promising fintech startups in India, emerging to disrupt traditional financial services. In 2022, Indian fintechs were the 2nd most funded startup sector in India, where investors invested $5.65 Bn in fintech companies.

If you are planning to secure funding for your fintech startup, estimating the value of your startup is a crucial step.

In this blog, we will explore different types of startup valuation methods, the fintech startup valuation process, and common factors influencing fintech startup valuation.

What Is Fintech?

The term fintech is a portmanteau of two words: financial and technology. It describes an app, software, or technology that enables businesses and consumers to perform financial activities digitally.

Fintech technology replaces multiple services offered by financial institutions and allows people to access, manage, and gain insights about their finances digitally.

The main focus areas of fintech are banking, insurance, and asset management.

Banking Insurance Asset Management Other
Personal Finance Products And Wealth Or Capital Markets
Solutions Investment Management
Payments/Transactions Distribution Traditional Advisers B2B Fintech
Money Lending Servicing And Claims Management Portfolio Management Regtech

What Is A Fintech Company?

A fintech company describes a business that sells technology created to improve, modify, and automate financial services.

The growth of fintech companies is driving high due to the evolution of technological developments, rising customers’ expectations for digital financial services and experience, increased availability of funding and capital in recent years, and proactive support from governments and regulators.

Common fintech services include

▶️ Blockchain:

Blockchain technologies for financial services, crypto exchanges, and crypto-currencies.

▶️ Peer-To-Peer Payments:

Payment processing, subscription billing, and card developer software tools.

▶️ Insurtech:

Digital insurance selling, data analytics, and software for reinsurers.

▶️ Wealth Management:

Wealth and investment management platforms and analytics tools.

▶️ Regtech:

Audit, risk, and regulatory compliance software.

▶️ Personal Finance:

Software to manage and track personal bills and credit accounts.

▶️ Money Lending:

Marketplace lending, microlending & alternative underwriting platforms.

▶️ Money Transfer:

Money transfer and tracking software for international payments.

▶️ Capital Markets:

Sales and trading, analysis, and infrastructure tools.

▶️ Buy Now, Pay Later (BNPL)

How To Value Fintech Startup?

There are multiple valuation methods available for identifying fintech market valuation. Below, we have divided different types of startup valuation methods into two categories: 

 

→ General valuation method: Ideal for every startup, including fintech.

→ Fintech startup method: Well suited for fintech startups.

 General Startup Valuation Methods

1. Revenue Multiple Method

This valuation method is based on revenue figures and predicts the startup’s potential worth once it starts generating profit. This method is ideal for startups generating steady revenue.

How to determine the startup’s worth using the Revenue Multiple Method?

Step 1: Estimate Future Revenue

The first step involves the company’s potential annual revenue projection, calculated considering the current demand, market size, and competitors’ performance.

Step 2: Research Industry Multiple

The next step is to determine the average revenue multiple based on the financial databases and industry reports.

 

Step 3: Calculate Potential Value

The final step is to calculate your startup’s potential value by multiplying the estimated future revenue by the industry multiple.

 

For instance, if your estimated future revenue is 1 Crore and the industry multiple is 3x, your startup’s potential value would be 3 Crore.

Advantages and Disadvantages of the Revenue Multiple Method

Pros:

  • Simple and straightforward method.
  • Ideal for startups with rapid revenue growth.
  • Provides a clear startup value estimate.

Cons:

  • Can overvalue low-profit startups with high revenue.
  • Not suitable for pre-revenue or low-revenue startups.
  • Doesn’t consider other crucial factors such as growth rate, market potential, or profitability of the startup.

2. EBITDA Method

The EBITDA method is widely used for startups that have earnings before interest, taxes, depreciation, and amortization (EBITDA).

How to determine the startup’s worth using the EBITDA Method?

Step 1: Estimate Future EBITDA

Start by conducting a detailed analysis of the business plan, startup growth strategy, expected sales, and operation costs to project the startup’s earnings.

Step 2: Research Industry EBITDA Multiple

Next, identify the EBITDA multiple by reviewing industry reports and financial databases.

Step 3: Calculate Hypothetical Value

After projecting EBITDA and industry multiple, multiply them to determine the hypothetical value of your startup.

Advantages and Disadvantages of the EBITDA Multiple

Pros:

  • Based on Industry Standards
  • Accounts for Profitability
  • Straightforward Calculation
  • Provides a Benchmark

Cons:

  • Based on Projections
  • May Overlook Potential
  • Not Suitable for All Industries
  • Requires Financial Expertise

3. Discounted Cash Flow (DCF) Method

The DCF Method is a unique startup valuation method that uses future cash flow projections and discounts them by using a required annual rate to calculate the present value estimation.

How to determine the startup’s worth using the Discounted Cash Flow Valuation Method?

Step 1: Project Future Cash Flows

In this step, detailed projections of future cash flows are created considering the account’s potential revenues, operating costs, capital expenditures, and changes in working capital.

Step 2: Determine Discount Rate

In the second step, determine the discount rate using the most common way WACC.

Step 3: Discount The Cash Flows

Next, apply the discount rate to projected future cash flows to find the present value.

Advantages and Disadvantages of the Discounted Cash Flow (DCF) Method

Pros:

  • Theoretically sound method 
  • Provide fair estimation for startups with stable and predictable cash flows.

Cons:

  • Quite complex and dependent on accurate forecasts
  • Less accurate results for startups with uncertain future cash flows.

 Fintech Startup Valuation Methods

1. Adjusted Revenue Multiple Method

This method modifies the standard revenue multiple method to better suit fintech startups. 

Well-suited for SaaS startups that generate income through subscription services, this method uses an enterprise value-to-recurring-revenue multiple to provide a valuation.

2. User or Transaction-Based Valuations

This method is ideal for platform-based fintech startups where the income is connected to active users or a number of transactions processed.

The user or Transaction-Based Valuation method will consider factors like active user metrics, user growth rate, and volume of transactions done through the platform.

User engagement, customer acquisition costs, and user retention rates are often considered when determining the value.

3. Marketplace Valuation

Fintech startups that operate a marketplace, for example, peer-to-peer lending platforms or cryptocurrency exchanges, find marketplace valuation a more relevant option.

This method not only considers the fintech services offered but also identifies the role of fintech platforms as facilitators.

4. Scorecard Valuation Model

In this method, first, an average estimate of similar startup companies is calculated and compared with startup. Through specific evaluation criteria and structured methods, scores and weights are assigned for each aspect to determine the overall startup valuation.

5. Berkus Method

This is one of the quickest and easiest methods to value a fintech startup. It values a startup based on the soundness of the idea, founding team, product prototype, existing customers, and sales volume.

6. Risk Factor Summation Method

The risk factor summation method considers a range of 12 parameters to value a fintech startup. As per this method, every parameter is rated on a scale of 5, multiplied by a factor of $250,000, and counted to give the sump of indicative valuation.

Fintech Startup Valuation Process

Step 1: Understanding USP

Investors will evaluate the unique point of the fintech company by looking at proprietary algorithms, business models, targeted demographics, and various other unique aspects for fair valuation.

Step 2: Assess Market Position

The fintech market position in the startup market will be determined by identifying competitors, market shares, brand recognition, and reputation.

Step 3: Determine Startup Potential

Investors will understand the current fintech market size and growth potential by evaluating the product or service offering’s scalability and adaptability in emerging markets.

Step 4: Analyze Financial Performance

Investors will analyze the fintech startup’s financial performance by looking at various factors such as revenues, expenses, and cash flow.

Step 5: Evaluate Startup’s Team

A skilled and experienced team is crucial for the success of a fintech startup. Investors will look at the team’s experience, skills, vision, and commitment to the company.

Step 6: Identify Risks

Potential risks such as regulatory risks, technology risks, market risks, and competition risks associated with fintech startups will be accessed by the investor before investment.

Step 7: Fintech Startup Valuation

After considering the above factors, investors will use the appropriate valuation methods to determine the valuation for the fintech startup.

Key Performance Indicators (KPIs) in Fintech Startups

Below are the most common KPIs that investors look into when valuing a fintech startup.

1. User Growth Rate

The number of new user startups is increasing. A high user growth rate shows product and service scalability and market acceptance.

2. Active Users

Active user numbers indicate user engagement and product value in the market.

3. Customer Acquisition Cost (CAC)

It is the cost of attracting new customers toward the product or service.

4. Lifetime Value (LTV)

The higher the LTV, the higher the profitability per customer.

5. LTV/CAC Ratio

A higher LTV/CAC ratio shows customer relationship profitability.

6. Churn Rate

This shows the number of customers who stopped using the product or service over a period of time.

7. Burn Rate

The burn rate shows the company’s capital spending rate, a crucial factor that shows the startup’s sustainability.

8. Revenue Run Rate

The future revenue rate is calculated considering current performance.

9. Transaction Volume and Value

Calculation of number of transactions and the value of transactions.

10. Net Interest Margin (NIM)

Calculation of the difference between interest income and expenses measures the profitability of a fintech startup.

11. Prepayment Rate

Ideal for lending platforms, this rate shows how fast the borrowers are paying their loans off.

12. Default Rate

This rate indicates the loans that are predicted to be not paid, giving the risk indication associated with the startup.

13. Regulatory Compliance Levels

Startup’s ability to handle complex regulatory compliances.

14. Profit Margin

Essential insights into startups’ potential profitability.

Key Factors Affecting Fintech Valuation

Here are some of the factors that influence the Fintech startup valuation.

☑️ Market Size and Growth Potential

☑️ Competition 

☑️ Regulatory Environment 

☑️ Intellectual Property (IP) and Patents 

☑️ Management Team

Benefits Of Fintech Startups In Gift City

1. Regulatory Clarity:

Gift City offers a regulatory environment with the International Financial Services Centres Authority (IFSCA) as the single regulator. This makes the regulatory process easier for startups and ensures compliance.

2. Incentives And Grants:

Another reason why fintech startups should consider Gift City is it provides financial incentives through the Fintech Incentive Scheme that help startup boost their financial health.

3. Tax Benefits:

Gift City offers various tax benefits, for instance, no GST on services with IFSC, exemptions from stamp duty and other taxes on security or transactions, and more.

4. Infrastructure Development:

There is rapid infrastructure development in Gift City. This makes it an ideal location for both work and living.

5. Sandbox Opportunities:

The sandbox mechanisms in Gift city provide a safer environment for Fintech startups to test and develop their Fintech ideas and solutions.

Apart from the above key benefits, there are various advantages that Gift City offers to Fintech startups. They are: 

  • Access to a vast pool of skilled professionals
  • Access to India stacks 
  • Commitment from global players 
  • Growing commercial and office spaces
  • Strong Government support and commitment 
  • Strategic location and connectivity

How To Build The Value Of Your Fintech Startup?

➡️ Generate Revenue:

The first thing to increase the value of your fintech startup is to start generating revenue. Put your best effort, plan an effective strategy, showcase your product, and start selling.

➡️ Get MVP:

The next important thing is having an MVP, i.e., a minimum viable product. This will help your startup raise more funds and at the same time, will bring more sales.

➡️Positioning:

Position your company in the right market and target the right audience and demographic.

➡️ Hiring process:

Hire experienced team members in the initial stage of the startup for higher success and more productivity.

Wrapping Up

Fintech startup valuation is a significant process that requires a thorough understanding of various aspects related to valuation methods and more.

The choice of the startup valuation methods completely depends on the individual startup’s stage, industry, and financial situation. Getting expert guidance when valuing a startup’s valuation can make the process more easier and reliable.

My Valuation is a renowned startup valuation firm in Bangalore, India. We have a team of highly skilled professionals and IBBI-registered valuers who have years of experience in creating the most accurate valuation reports using various valuation methodologies.

If you are looking for assistance with your fintech startup valuation, please feel free to contact us.

Leave a comment

Your email address will not be published. Required fields are marked *

Get Valuation Report for Raising Funds from Investors

We provide valuation services that assess the optimal value of businesses.

    Please prove you are human by selecting the tree.