Early-Stage Startup Valuation

Risk Mitigation, Step-Up, Checklist & Scorecard Methods

Though quantitative valuation is ideal for active startups, qualitative pre-money valuation is vital to these companies’ early-stage counterparts.

In addition to determining the total value of the startup, this process sheds light on the qualitative aspects of the startup.

Put simply, pre-money valuation helps to reveal what the startup might be worth before any financial investments come in. This helps to facilitate fundraising negotiation.

Startup Falcon applies data mining and AI to evaluate startups using a number of proven methods—using historical data as our main source (particularly for the Checklist and Scorecard methods). With our calculation tool in your arsenal, you’ll know just how much your company is worth.

Methodologies

1

Risk Mitigation Method

As the startup begins to accomplish specific tasks—for instance, attracting paying customers or filing for a patent—the risk decreases. As a result, the qualitative valuation increases.
Enter the Risk Mitigation Method, which assigns specific dollar amounts to the startup’s accomplishment and validations. These are based on four specific risk mitigation categories including Technology, Market, Execution, and Capital:

Technology

This category investigates whether the product is working as planned, and whether the costs involved in manufacturing or deploying it support the relevant business model.

Market

This category explores whether customers are engaged in the product (and willing to pay for it), along with the size of the market.

Execution

This category poses questions such as: Is the startup’s team well-versed in their segment? Are the founders experienced in the startup community?

Capital

This category examines whether the founders have invested their personal funds into the startup, and whether they’ve created a funding plan.

The values assigned to each category may represent either an
actual monetary amount, or estimations of a future outcome. The
Risk Mitigation Method is ideal for summarizing a number of
smaller elements.

2

Checklist Method

Also known as the Berkus Method, this approach was developed by angel investor David Berkus.
Berkus created the Checklist Method because he found most revenue forecasts were inaccurate. To mitigate this, he set out to develop a simplified approach. This method is a seamless way to get a clear sense of a startup’s pre-money valuation.
Specifically, it involves assigning a monetary valuation to five external factors based on specific elements of risk. The checklist items include

An idea with potential—including basic value and an acceptable level of risk

Plans to reduce execution risks (by way of a quality management team or by other means)

A prototype that lowers technology risks

Strategic partnerships to reduce competition

Adequate product rollout and sales plans

Each factor marked “yes” adds a specific monetary amount to the
startup’s valuation. There is a maximum value for each checklist
item, and the startup is compared to this maximum value to reach
the pre-money valuation amount.

3

Step-Up Method

Quick and simple, this approach builds on David Berkus’s approach outlined above.
Rather than five external accomplishments and validations, however, the Step-Up Method allows founders to rate their startup on 10 factors.

Total market size over a specific monetary amount

Scalable business model

Founders with previous exits or significant startup experience

More than one founder engaged in the company full-time

Minimum viable product developed (with customer development in progress)

Paying customers engaged in the business model

Strategic partnerships to reduce competition

Execution roadmap underway

Technology protection and/or IP issued

Favorable competitive landscape

Each factor marked “yes” adds a monetary sum to the startup’s
pre-money valuation. Each validation item on the list can receive
either full or partial credit.

4

Scorecard Method

Developed by Bill Payne, this straightforward valuation method examines the startup in contrast to similar companies—meaning those with a similar team, market segment, and location—based on several factors.

In other words, it compares the startup in question to already-funded ventures using Payne’s equation, adjusting the average valuation as needed.

Management team strength

Opportunity size

Product and/or technology

Competitive environment

Marketing, sales channels, and partnerships

Need for further investment

Miscellaneous

For the best results, and the most accurate estimation, early-stage
startups should rely on all four methods. What’s more, though pre-money
valuation is fairly consistent by location, our qualitative pre-money
valuation tool takes things a step further by covering the entire industry.
All early-stage startups can leverage Startup Falcon to their advantage.