Which Startup Valuation Method to choose?
How to value a startup? Which model will fit best? Investors and founders face this question over and over again in their professional life. Which startup valuation method to consider for a particular case is tricky. Different methods will return different valuations, as input variables go far beyond pure financial parameters. Conventional valuation models – for established companies – often exclude soft facts. Startups are meant to be sold or exited, thats another differentiator to traditional valuation methods.
Depending on the stage and sector of startups, you will find different startup valuation models. In our overview we introduce startup valuation methods, for tech companies. We will introduce different valuation methods and explain how they are meant to be used. You will learn how to choose the best valuation method for your company or investment case.
5 methods for startup valuation
In the following table, we have summarised five popular valuation methods. Explore the models by clicking into the dedicated articles. You will find free valuation calculator spreadsheets and an online calculator to play with.
|#1 Berkus Method||Valuation is based on the analysis of 5 key success factors|
|#2 The Payne Scorecard Method||Valuation is based on a weighted average value, adapted for a comparable company|
|#3 Venture Capital Method||Valuation is based on the ROI assumed by the investor|
|#4 First Chicago Method||Valuation is based on the weighted average of 3 valuation scenarios|
|#5 Venionaire Startup Rating Model||Valuation is based on 6 value drivers|
1) The Berkus Method
David Berkus, the Californian business angel investor, estimated that only one out of twenty startups hits its revenue forecast. His valuation method is based estimations and experiences. Business Angels use it as a rule of thumb. For pre-revenue companies or even pre-seed startups this model works well.
2) The Payne Scorecard Method
The Scorecard Method developed by Bill Payne, was designed for rather early stage startups as well. It takes comparable companies into consideration. The main principle is to determine a median valuation for pre-revenue startups. Those valuations differ by given geographic region or industry. Scoring criteria like ‘strength of the management team’, ‘size of the market’ and so on, will adjust the estimated mean valuation. The starting median value is multiplied by the weighted average score. For proper results this calculation needs a lot of data from databases and labor intense research.
3) Venture Capital Method
The Venture Capital Method is ideal for investors who want to get a quick, rough valuation of a startup that doesn’t require many inputs or time. The VC method focuses on calculating the expected value of your company after a set number of years. Based on the result investors can define how much they are willing to invest now by calculating how much the start up will be worth in the future.
4) First Chicago Method
The First Chicago Method is an ideal valuation method for post-revenue startups. By using the Discounted Cash Flow method or equivalent values, the First Chicago Method calculates three future scenarios for investors – best-(management) case, middle-case and worst-case scenarios. Investors can get an overview of the potential return and risk of their investment.
5) Startup Rating Model by Venionaire
The Venionaire Rating Model takes the individual strengths and weaknesses of a startup into account. It may be applied for early and later stage startups. The newly developed method takes 6 value drivers: team, market, product, technology, scaling strategy and KPIs as a driving force behind a given startup´s success. These factors, mostly ignored by other methods, have been found to be the most relevant in academic research. Each of the 6 value drivers gets valued on a scale from 1-5. Summing up those value-drivers in the weighted matrix, will result in a calcuated premium or discount for an investor to consider, based on a given startup rating.
This was a brief overview of all valuation methods we have covered in our series of articles so far. If you are wondering which valuation fits your startup best and want to learn how these instruments work in practice, the best way to do that is by visiting one of our Venionaire Master Class 1-on-1 Valuation Coaching. Not only will you learn common valuation methods for startups in theory and practice, but also get a deep insight on how investors around the world value venture capital and private equity investments.