Right so today you'll learn about how to put a price tag on your business, even if it doesn't have revenue yet.

This is aimed at two types of business owners: the startup founders and the crypto founders.

First of all, why are we doing this?

Last week I was invited to a podcast ran by Tahir who owns the biggest business trading platform in Dubai. I loved discussing with him because he knew exactly how to do company valuations, using all three methodologies. We joked about the fact that owners are hesitant to learn how much their business is worth because that is ultimately, their own net worth.

That's right. Your net worth is not your network. It is worth of all your assets, including your business. Most people usually calculate their net worth based on what they own like cars, homes, land. When actually most of their net worth comes from the business that they own.

Today's company valuation is through IFRS methodology, aka the 'market price'. This is a very useful tool for businesses that have yet to complete 12 full months of accounting, as well as for businesses with no traditional enterprise value - blockchain projects.

The market value of your business is calculated through:

• market approach (TAM, SAM, SOM)
• income approach (ARPU, LTV, CAC)
• cost approach (COGS, OPEX, CAPEX)

Depending on how mature the business is, these three categories have three layers of input:

1. Level 1 Highest quality (most reliable)
   • Definition: Quoted prices in active markets for identical assets or liabilities.
   • Examples: Public equity prices on exchanges, liquid bonds.
   • Characteristics:
     • Directly observable
     • No modeling required
     • Minimal judgment
   • Interpretation: This is the gold standard. If Level 1 exists, you must use it.
2. Level 2 Intermediate quality
   • Definition: Observable inputs other than Level 1 quotes.
   • Examples:
     • Quoted prices for similar assets
     • Interest rate curves, credit spreads
     • Market-corroborated inputs
   • Characteristics:
     • Some adjustments required
     • Moderate judgment
   • Interpretation: Acceptable when Level 1 is unavailable, but introduces estimation risk.
3. Level 3 Lowest quality (most subjective)
   • Definition: Unobservable inputs based on internal assumptions.
   • Examples:
     • Discounted cash flow models
     • Private company valuations
     • Illiquid assets
   • Characteristics:
     • Heavy reliance on management assumptions
     • High estimation uncertainty
   • Interpretation: Necessary for private or illiquid assets, but least reliable and most scrutinized.

Think of the hierarchy as a credibility gradient:

• Level 1 is price discovery
• Level 2 is price inference
• Level 3 is price construction

For M&A, capital strategy, and exits:

• Early-stage / private businesses = Level 3 dominated
• Late-stage with comparables = hybrid Level 2/3
• Public comps = anchored in Level 1

For startups, replacement cost of software is Level 1, while market size is Level 2 and distribution (if it hasn't occurred yet) is Level 3. Usually after Seed round, there is already a PMF (product-market fit) and distribution graduates to Levels 2 even 1.

For crypto projects, the biggest liability when seeking institutional investors is, many times, the value driver in the project. While smart contracts can be used as Level 1 when talking to angel investors or crypto foundations, these are Level 3 inputs for institutional investors. An example is the Cooperative Model - users who stake the coin have voting rights and profit unit interest. While in many ways, corporate governance and tokenomics are safer on the blockchain because they are undisputed, these lack enforcement in real world corporate law. This is what gives VC funds the ick.

This will be the subject of our next weekly group session on Wednesday, April 29th, 9pm Dubai time. 👈 Click here to join

See you next time for Part 3.

If you missed Part 1, read it here.​