How to do a startup valuation using 8 different methods.

Startup valuations provide insight into a company’s ability to use new capital to grow, meet customer and investor expectations, and hit the next milestone. Today, unicorn valuations — businesses valued at $1 billion or more — number in the hundreds. There are now “decacorns,” startups valued at $10 billion, and even “hectocorns,” valued at over $100 billion. 

While impressive, these calculations aren’t as objective as you might think. A startup valuation may account for factors like your team’s expertise, product, assets, business model, total addressable market, competitor performance, market opportunity, goodwill, and more. 

If you have actual revenues, you’re able to use concrete economic numbers as a starting point. But in the context of startup fundraising, your company is ultimately worth what you and your investors agree it's worth. And most angel investors and venture capital firms use multiple formulas to find the pre-money value of a business, or how much it’s worth before they invest. 

It’s fair to say that valuing a startup is both an art and a science. Whether you’re in the pre-seed stage or just issuing stock options to your employees, it will help you to understand the different startup valuation methods. In this article, we’ll go over eight methods you can use to value your startup and prepare for future fundraising talks. 

8 common startup valuation methods.

Calculating value will always involve a little guesswork, but there are some helpful materials you can have ready. Financial statements like a balance sheet are essential. Be prepared to assess the skills and experience of your team and identify any strengths and weaknesses. 

You can use databases like AngelList or Crunchbase to directly compare your valuation to similar businesses, or you can check online indexes and public business reports.

By nature, valuations will differ across locations, industries, and years. For example, a Silicon Valley property technology startup founded in 2009 shouldn’t be the measuring stick for a Boston proptech startup in 2020. And a B2B company may have dramatically different inputs than a B2C company. 

1. The Berkus Method.

The Berkus Method was created by venture capitalist Dave Berkus to find valuations specifically for pre-revenue startups, i.e., businesses not yet selling their products at scale. The idea is to assign dollar amounts to five key success metrics found in early-stage startups. 

The simple formula helps founders and investors avoid faulty valuations based on projected revenues, which few new businesses meet in the expected time period. 

Here’s a summary:

This method caps pre-revenue valuations at $2 million and post-revenue valuations at $2.5 million. Although it doesn’t take other market factors into account, the limited scope is useful for businesses looking for an uncomplicated tool.

2. Comparable transactions method.

The Comparable Transactions Method is one the most popular startup valuation techniques because it’s built on precedent. You’re answering the question, “How much were startups like mine acquired for?”

For instance, imagine that Rapid, a fictional shipping startup, was acquired for $24 million. Its mobile app and website had 700,000 users. That’s roughly $34 per user. Your shipping startup has 120,000 users. That gives your business a valuation of about $4 million. 

You can also find revenue multiples for similar companies in your sector. In your market, it may be normal for SaaS companies to generate 5x to 7x the previous year’s net revenue. 

With any comparison model, you need to factor in ratios or multipliers for anything that’s dramatically different between your two businesses. For example, if another SaaS company has proprietary technology and you don’t, you may want to use the multiplier on the lower end of the range, like 5x (or lower) in our example above. This method is similar to the Market Multiples Approach.

3. Scorecard valuation method.

The Scorecard Method is another option for pre-revenue businesses. It also works by comparing your startup to others that are already funded but with added criteria. 

First, you find the average pre-money valuation of comparable companies.Then, you’ll consider how your business stacks up according to the following qualities. 

• Strength of the team: 0-30% 
• Size of the opportunity: 0-25%
• Product or service: 0-15%
• Competitive environment: 0-10%
• Marketing, sales channels, and partnerships: 0-10%
• Need for additional investment: 0-5%
• Other: 0-5%

You’ll then assign each quality a comparison percentage. Essentially, you can be on par (100%), below average (<100%), or above average (>100%) for each quality compared to your competitors. For example, you give your ecommerce team a 150% score because it’s complete, fully trained, and has experienced developers and marketers, some from rival businesses. You’d multiply 30% by 150% to get a factor of .45. 

Do this for each startup quality and find the sum of all factors. Finally, multiply that sum by the average valuation in your business sector to get your pre-revenue valuation. Learn exactly how to assign percentages and weigh each factor in this explanation by Bill Payne, the method’s creator. 

4. Cost-to-duplicate approach.

The key to this method is in the name. You’re figuring out how much it would cost to recreate your startup elsewhere — minus any intangible assets, like your brand or goodwill. 

You simply add up the fair market value of your physical assets. You may also include research and development costs, product prototype costs, patent costs, and more.

One major drawback is that this method inherently doesn’t capture the full value of a company, particularly if it’s generating revenue. In calculating your startup’s valuation, you may have to ignore elements that are particularly relevant, like your customer engagement.