How to Valuate a Startup: Tips for Calculating App Value

How to Valuate a Startup: Tips for Calculating App Value
michael-signal@2x By Michael Signal February 17th 2020

 

As the software development industry presents a nearly incalculable potential for growth, it should come as no surprise that the number of new players entering the field only seems to increase over time. And as the barrier to entry continues to lower and the industry becomes more accessible, we can expect that increase to accelerate further.

Thanks to the impact of new digital business models, some commentators are already calling this the beginnings of “The Fourth Industrial Revolution”.

It’s an exciting time, but with that excitement comes stiff competition. To sell an app in this climate, you need to know both how to calculate and maximize your app value.

In this regard, there are two main points: building an app around its value, and determining what that value is.

What Goes Into Building an App?

As of this writing, there are more than 2.8 million apps available on the Google Play store. Well, they say that there’s nothing new under the sun, and in the case of app development that may well be true.

That’s why in building your app, you actually need to put the business model ahead of the idea.

In a more conventional business, it wouldn’t make much sense to try to value a product before it’s even conceptualized. But that is the position that app developers find themselves in.

Many of the same factors that determine a business’ value to a potential future buyer overlap with the same value that make the business viable in the first place.

To that end, a good place to start is determining what niche you want to fill or what audience you want to reach. Using that as a springboard, you can better position yourself for success later.

What Influences an App’s Value?

So for our purposes, let’s assume that you’ve come up with a service that uses a “freemium” business model but targets an underserved niche. The specifics aren’t important, assuming that you followed our first point and built your app with a steady business model as the priority.

Your earnings will form the baseline of your app’s value. For a fledgeling app-based business, this should be easy to calculate.

Most companies worth less than $5 million (which is very likely your business) use what’s called Seller’s Discretionary Earnings (SDE) to determine value. The SDE is simply your total revenue, minus the cost of goods sold operating costs, and the owner compensation added back into the total value.

The sum formes the basis of your app’s value. Factors that can positively influence your business’ value include longevity, a stable userbase, and growth over time.

These factors combined, demonstrate a viable and growing business to potential buyers, with your SDE forming the basis of a dollar amount in value.

Maximizing Your App Value

The software development industry is still in its adolescence, and that market will continue to react to new trends and developments in technology.

But business is business, so you can still understand app value in the same way that you would any venture. Investors will want to know how much capital they need to put up versus the potential return on their investment. If you understand that, then you can devise a pitch that will illustrate your app’s value.

Understanding how to value an app, now all that’s left for you is to get to work. To get started, check out our complete guide on mobile app development.

michael-signal@2x By Michael Signal

Michael is the creative brains of the company and he leads the UX and UI team at EB Pearls. He has experience of over 20 years in interaction design and have designed digital products for Fortune 50 companies all over the world.

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