The Financial Regulatory Authority (FRA) has issued new rules for valuating startups in what it says is a bid to help them secure financing, it said in a statement (pdf). The regulations will require independent financial advisors registered with the FRA to adhere to new methods for valuing startups at different stages, including for initial public offerings (IPOs) and investor exits, Enterprise understands.

What’s new? The FRA has introduced new venture capital valuation methods that factor in a number of variables to determine a startup’s value in the pre-revenue stage, according to the statement. These include the company’s value at the investor’s planned time of exit, the expected return on investment (ROI), and the projected exit value. The statement outlines methods for calculating some of these variables. The valuation rules also include sectoral considerations and draw on SWOT analysis — an assessment of a company’s strengths, weaknesses, opportunities, and threats — among other factors.

Startups are a different animal: Before the FRA’s decision, local standards for valuation only regulated the way “traditional companies” already in operation are valued, our source told us. New rules were needed for startups because they operate under a different model. While well-established firms have financial statements and historical data that can be used in company valuations, new startups mostly draw on forecasts. Startups also typically have higher expenses, lower revenues, and the potential for exponential growth, our source added.

The venture capital industry has created a range of loosely-but-broadly applied standards for valuing startups. Read more at the Corporate Finance Institute or Investopedia.

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