It’s always a problem to value a startup company because it is relatively new and young in the market. Usually, a startup company does not have any revenue and hence no profit. Therefore, this company is referred to as a pre-revenue startup company.
Valuation Methods for a Startup Company
Startup Company Valuation Method #1: Berkus Method
This method was created by a venture capitalist, Dave Berkus, and it is specifically designed for pre-revenue startup companies.
There are five key success factors normally found in early-stage start-ups, and each factor shall be assigned with a monetary value of up to $500k. $500K is the maximum value that can be earned in each category, allowing a pre-money valuation of up to $2M-$2.5M.
- The business idea (basic value)
- Having a prototype (reduces technology risk)
- Strength of the management team (reduces execution risk)
- Strategic relationships (reduces market risk)
- Having rolled out a product or starting sales (reduces production risk)
For example:
| Berkus Method | |
| Sound Idea (basic value, product risk) | $ 300,000 |
| Working Prototype (reduces technology risk) | $ 120,000 |
| Quality Management Team (reduces execution risk) | $ 150,000 |
| Strategic Relationships (reduces market risk and competitive risk) | $ 280,000 |
| Product Rollout or Sales (reduces financial or production risk) | $ – |
| Start-up Value | $ 850,000 |
Startup Company Valuation Method #2: Scorecard Method
This method is more elaborated from the Berkus method which considered additional factors, e.g., the need for additional investments and other miscellaneous factors (i.e., early customer feedback).
There are six factors, and these are weighted based on their impact on the overall success of the project (i.e., Strength of Management 30%, Size of Opportunity 25%, etc). Then, the valuer/investor assigns each factor a percentage based on the startup company’s performance as compared to its competitors: on par (100%), below average (<100%), or above average (>100%).
This is also considered as the most useful method for angel investors.
Pre-money valuation = $1,000,000
| Comparison Factor | Target Start-up | Factor | |
| Strength of Management | 30% | 150% | 45.00% |
| Size of the Opportunity | 25% | 125% | 31.25% |
| Product/Technology | 15% | 80% | 12.00% |
| Competitive Environment | 10% | 50% | 5.00% |
| Marketing/Sales/Partnerships | 10% | 75% | 7.50% |
| Need for Additional Investment | 5% | 100% | 5.00% |
| Other factors (great early customer feedback) | 5% | 100% | 5.00% |
| Sum | 110.75% |
Pre-money valuation = $1,107,500
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Startup Company Valuation Method #3: Venture Capital Method
As the name suggested, Venture Capital (VC) method is another option for pre-revenue start-ups, and it is based on the mindset of investors who are looking to exit a business within several years.
By applying this method, it’s important to know the following equations:
- Post-money valuation= Terminal value ÷ Expected Return on Investment (ROI)
- Pre-money valuation= Post-money valuation — Investment
Firstly, the Terminal value needs to be determined, which is the anticipated selling price of a company on a certain date in the future. Then, we determine the ROI (e.g., 12 times) and calculate its post-money valuation. Thereafter, by subtracting the initial investment amount, pre-money valuation can be obtained.
Startup Company Valuation Method #4: First Chicago Method
This method focuses on the cash flow and outlines three possible scenarios: best case, worst case, and normal case.
Each scenario will be based on Discounted Cash Flow (DCF) of a start-up company. A percentage will be assigned for each different scenario based on what is likely to happen. Then, the valuation of the company will be the weighted average of each scenario. This method is suitable for a start-up company that is starting to generate revenue.
Which method works for your Startup Company?
In summary, these four methods are most often used in valuing a start-up company. There are other methods that can be applied as well (i.e., Risk Summation Method, Comparable Transactions Method, Cost-to-Duplicate Method).
Are you keen to find out what your startup company is worth? We offer professional business valuation services. Get in touch with us today!