Startup valuation is an art that combines numbers, intuition, and common sense. In the world of new technologies—where many companies have yet to generate revenue—traditional financial approaches often fail. So how can we accurately assess the value of a young company? Is the founder’s experience a reliable key to success, or perhaps the biggest trap?

Below we present five proven methods for effectively valuing startups.

1. Berkus Method

Dave Berkus, one of the most active angel investors in the United States, created this method in the 1990s. As an investor focused on pre-revenue startups, Berkus noticed that traditional valuation methods based on financial data were ineffective at such an early stage. He therefore concentrated on qualitative factors that could influence a startup’s success. Berkus is also an author of several books and a renowned speaker in entrepreneurship.

The Berkus Method assigns monetary value to five key factors:

• Business Idea: Is the concept innovative with significant market potential?
• Prototype: Does a Minimum Viable Product (MVP) exist to reduce technological risk?
• Management Team: Do founders possess relevant experience and competencies?
• Strategic Relationships: Does the company have partnerships or advisors supporting its growth?
• Product Rollout/Sales: Has the product been tested in the market?

Each factor can add up to $500,000 to the valuation, resulting in a maximum total valuation of $2.5 million.

Advantages:

• Simple and quick to apply.
• Focuses on key qualitative aspects.

Disadvantages:

• Subjective evaluation of individual factors.
• Does not account for market dynamics or future cash flows.

2. Scorecard Valuation Method

The Scorecard Method was developed by Bill Payne, an experienced angel investor. Payne recognized that pre-revenue startups require a more comprehensive approach than offered by the Berkus Method alone. The Scorecard Method compares a startup with similar companies within its region and industry.

This method uses the average valuation of comparable companies as a baseline and adjusts it according to the following weighted factors:

• Management Team (30%)
• Market Size (25%)
• Product/Technology (15%)
• Competitive Environment (10%)
• Marketing/Sales Channels (10%)
• Other Factors (10%)

The startup’s valuation is calculated by multiplying the average market valuation by the sum of these weighted factors.

Advantages:

• Incorporates industry benchmarks.
• Allows evaluation of qualitative aspects.

Disadvantages:

• Subjectivity in assigning weights.
• Difficulty finding appropriate comparisons.

3. Discounted Cash Flow Method (DCF)

The DCF method originated as a financial analysis tool for large corporations but has been adapted for revenue-generating startups. It is based on the concept of time value of money.

DCF forecasts future cash flows and discounts them back to present value using a discount rate reflecting investment risk. The formula is:

PV=FCF/(1+r)n

Where:

• PV: Present Value
• FCF: Future Cash Flows
• r: Discount Rate
• n: Number of years

Advantages:

• Precise financial analysis.
• Considers future financial performance.

Disadvantages:

• Requires accurate financial forecasts.
• Sensitive to changes in model parameters.

4. Venture Capital Method (VC Method)

The VC Method was developed by William Sahlman from Harvard Business School in the 1980s to help venture capital funds evaluate potential investment returns.

This method calculates a startup’s exit value after a defined investment period and discounts it back to present value using investors’ expected rate of return:

PV=(Exit Value)/(1+r)n

Where:

• PV: Present Value
• Exit Value: Expected exit value
• r: Discount Rate
• n: Number of years

Advantages:

• Clearly calculates expected return on investment.

Disadvantages:

• Often results in lower valuations from founders’ perspective due to high expected returns required by investors.

5. First Chicago Method

The First Chicago Method was developed in the 1980s by the venture capital division at First Chicago Bank to account for various business development scenarios. It considers three scenarios:

1. Optimistic
2. Realistic
3. Pessimistic

Each scenario is assigned a probability, and the company’s valuation is calculated as a weighted average of these scenarios.

Advantages:

• Accounts for multiple possible development paths.

Disadvantages:

• Subjectivity in assigning probabilities to scenarios.

These methods illustrate how diverse startup valuation approaches can be. Each was created in response to specific needs from investors and founders, adapting to different business stages and available data. Selecting an appropriate method depends on your startup’s characteristics and your goals when negotiating with investors.

Sources:

• Dave Berkus – Official Website
• The Berkus Method Explained – FasterCapital
• Pre-Revenue Startup Valuation – Venionaire
• How to do Valuation of Startup using the Scorecard Method – Chunderkhator
• Discounted Cash Flow Explained – Investopedia
• How To Calculate Your Startup’s Valuation – Ingressive Capital
• First Chicago Method Explained – TIOmarkets