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