Startup Valuations: Using Several Methods to Determine the Pre-money Valuation of Pre-revenue Companies

March 4 2011 2 Commented

Since the end of January, we have posted explanations of five methods for establishing the pre-money valuation of pre-revenue companies, specifically:

                The Scorecard Method (January 31, 2011)

                The Venture Capital Method (February 5, 2011)

                The Dave Berkus Method (February 14, 2011)

                The Cayenne Valuation Calculator (February 19, 2011), and

                The Risk Factor Summation Method (February 27, 2011)

Good practice suggests using at least three methods to first estimate the appropriate pre-money valuation and then using those results to finalize the valuation.  For example, if the three methods give approximately the same number, simply average the three.  If one method seems to be an outlier, use the average of the other two.  Alternately, if one method is an outlier, calculate the pre-money valuation using a fourth method, in an attempt to find three methods in close agreement.  If the three methods are uncomfortably different, feel free to use one or even two additional methods to arrive at a fair valuation.

The Scorecard Method is my favorite and it can be used as the primary valuation method.  I like the Risk Factor Summation Method, but only as a supplemental methodology because it considers factors not always included in investor considerations.  The other three methods are all valuable, but should, in my opinion, be used in combination with the Scorecard Method.

2 Responses to “Startup Valuations: Using Several Methods to Determine the Pre-money Valuation of Pre-revenue Companies”

  1. Robbie says:

    Howdy,

    I have been working with a pre-money / pre-rev start up for a month now. The CFO is determined to raise capital by valuing the as is co only using DCF of 5 / 8 year projecions. This is obviously creating contention in the group. Any subtle advice I could throw his way to discourage this?

    Cheers

    Robbie

  2. admin says:

    Hi Robbie- DCF of pro-forma financials is folly and any CFO worth his salt knows it. Comps with other startups in the same business vertical and at the stage are the only way to value pre-revenue startups. Show him the Scorecard Method (paper linked to my blog). It is the best starting point that I know. Good luck! Bill