How To

How to quickly estimate a startup’s value, explained with Timbits

How do you know if you’ve got a unicorn? This calculation helps analysts reach a back-of-the-envelope valuation

Everyone’s looking to invest in unicorns—that select group of tech startups valued at more than $1 billion. But how do you decide how much a company’s worth when it hasn’t turned a profit yet (or maybe isn’t even collecting revenue yet)? Here’s a ballpark calculation supplied to us by a technology analyst at a research and advisory firm (and who we granted anonymity, in order to protect their investments):

{ ( E × MS ) + 20% } × P

Here’s how it works: Multiply the number of full-time employees a company has (E) by the median salary in the market (MS). Add 20% for operating costs like rents and technology. The P represents the potential of the company, which can be a multiple of two to 50 depending on how fast the customer base in growing, whether it has revenues and how hot the category is. What you get is a gut-check, back-of-the-napkin test to see if a valuation bears any resemblance to reality.