Rules of Thumb for Russian IT Startup Valuation

Business valuation of young companies is hot topic among professional investors, venture capitalists and business angels. There is a well-known phrase that valuing a young company is a sort of art. Community of researchers and investors has developed several basic and many specific valuation methods. These methods are commonly and successfully applied for venture valuation. However, few methods are applicable to valuing young companies. While reliable financial history serves as a basis for traditional valuation methods, some startups fail to provide the required data. What is more, young companies face high level of uncertainty. Thus, making accurate forecasts for such companies becomes an issue. In the last two years the share of pre-money deals and business angels’ activity increasing in the Russian market. For these purposes in the western markets, so-called rules of the thumb are applied. These methods allow you to make an approximate estimate of the company's value by estimating indirect factors. In this paper, we consider the most famous rules of thumb and their applicability to Russian companies. Since these rules usually operate with estimates for the US market, Russian business angels should adapt them correspondingly. In the third part of the paper, we show an example of drawing up similar rules for a specific industry - web development. To develop specific rules, we analyzed the financial performance of the web agencies in scope. This analysis made it possible to understand better what an investor can expect when buying a web studio at the initial stages of its development.