Valuation Methods in the Entrepreneurship Ecosystem
The transformation of creative ideas into real-world products and services, or the birth and growth of new ventures, makes significant contributions to economic vitality and employment growth. One of the critical milestones encountered in this challenging journey of ventures is determining how valuable the venture actually is. The answer to this question is crucial for both entrepreneurs and potential investors.
The transformation of creative ideas into real-world products and services, or the birth and growth of new ventures, makes significant contributions to economic vitality and employment growth. One of the critical milestones encountered in this challenging journey of ventures is determining how valuable the venture actually is. The answer to this question is crucial for both entrepreneurs and potential investors. While making investment decisions in ventures, creativity comes into play alongside traditional methods. These valuation methods help us understand the potential, future earnings, and risks of a venture. Methods such as income-based valuation, asset-based valuation, and market-based valuation offer different approaches depending on the venture’s characteristics and sector.
Before moving on to the valuation methods used for ventures, we must first mention how traditional companies are valued — since ventures are fundamentally evaluated using the same logic. An income-based valuation method, the Discounted Cash Flow (DCF) method, calculates the present value of a company’s future cash flows by discounting them. However, since startups are often “burning cash” and using capital for growth, this method is generally not preferred for early or growth-stage companies.
An asset-based valuation method, the Net Asset Value (NAV) method, is also not commonly used in the entrepreneurship ecosystem. Considering that the most important assets of ventures are Intellectual Property (IP) rights, and since these are usually recorded at very low values in their books, this method is rarely applied.
The Comparable Transaction Analysis (CTA) method, however, is one of the most widely used approaches in both traditional and venture ecosystems. In this method, valuation is made based on the prices of comparable companies or assets using specific criteria. In other words, a company determines its value by benchmarking itself against similar companies in the sector, comparing financial metrics such as EBITDA or net profit, and applying relevant multiples to its own EBITDA or net profit.
This comparable companies method is widely used in the venture ecosystem as well. However, it requires an innovative perspective. While profitability multiples are typically used in traditional methods, they cannot usually be applied to startups. Therefore, valuations are performed using multiples based on Revenue, Gross Merchandise Volume (GMV), and similar metrics. Revenue multiples for technology companies often align with profitability multiples for traditional companies — and at times, technology companies can trade at even higher multiples.
For example, due to growth expectations fueled by the pandemic, SaaS companies saw average Annual Recurring Revenue (ARR) multiples rise to 27x in 2021, only to drop to 5x by the end of 2022, and then rebound to around 8x in the second quarter of 2023. This clearly shows how important growth expectations and sector metrics are in valuation.
When working with average multiples, which multiple to apply for a target company depends on its historical growth rates and profit/loss situation. For SaaS businesses, we look for the sum of Growth Rate (%) + EBITDA Margin (%) to exceed 30% as a sign of healthy growth. At around 30%, average revenue multiples are used; below or above that level, the multiple is adjusted downward or upward to calculate valuation.
When conducting revenue multiple valuations, other metrics and ratios should also be considered to refine the multiple analysis. For instance, non-financial metrics such as Lifetime Value (LTV), Customer Acquisition Cost (CAC), or GMV can be incorporated, particularly for marketplace businesses. Companies with an LTV/CAC ratio above 2 are considered investment-ready, while those above 3 are considered highly successful.
For companies with an LTV/CAC ratio above 2, valuation is typically calculated using GMV multiples:
If LTV/CAC is between 2 and 3 → Valuation = GMV × 2
If LTV/CAC is above 3 → Valuation = GMV × 3–4
In some cases, particularly with very early-stage gaming startups, concrete numbers or financial data may not yet be available. Since Turkey is an advanced market for gaming investments, we can benchmark against the structure and funding rounds of comparable companies to calculate valuations. For early-stage gaming startups, the founders and teamaccount for 70–80% of the valuation. Therefore, founder and employee profiles are examined carefully and compared to those of similar funded startups.
Globally, creative valuation methods continue to emerge, mainly based on the comparable companies approach. At Boğaziçi Ventures, our strategy is to stand by the companies we invest in throughout their long journeys. During valuation periods, we perform tailor-made analyses for each portfolio company. The examples in this article are just a few of the valuation methods we use. For each company, we develop valuations based on different metrics and checkpoints. By creating innovative valuation methods, we aim to achieve fair valuations that enable entrepreneurs to bring their innovative ideas to life.