The Startup Investment Game — Valuation
How much am I worth? This week, we took part in a Startup Investment Game. It is a simulation of the fundraising/ investment processes in the real world. In the rule book, the objective is straight forward — convince investors to invest in my business idea and be the team with the highest valuation at the end of the game. After the game, I thought — was our idea undervalued or overvalued?
What is valuation? According to Investopedia, valuation is a quantitative process of determining the fair value of an asset or a firm. In general, a company can be valued on its own on an absolute basis, or else on a relative basis compared to other similar companies or assets.
Absolute valuation models attempt to find the intrinsic or “true” value of an investment based only on fundamentals. Looking at fundamentals simply means you would only focus on such things as dividends, cash flow, and the growth rate for a single company, and not worry about any other companies. Valuation models that fall into this category include the dividend discount model, discounted cash flow model, residual income model, and asset-based model.
Relative valuation models, in contrast, operate by comparing the company in question to other similar companies. These methods involve calculating multiples and ratios, such as the price-to-earnings multiple, and comparing them to the multiples of similar companies.
Can I draw the same concepts of valuing a company to valuing an item in the secondhand market. When I try to determine a value of an item in the secondhand market, I consider the following factors:
- What was the retail price?
- How much has it been used? Eg. by time, mileage, battery charging cycles, physical condition, generation.
- What is the asking price of other sellers for the same product?
The fundamental concept of valuing a company sounds similar to valuing items in the secondhand market, but with more components and using more complex models.
I am still in the process of grasping the technique of fair valuation and there is much for me to learn about.
