How it's calculated
A pre-revenue startup has no revenue or profit to multiply, so early-stage investors use structured judgement. The calculator offers three widely used methods; using more than one gives a range rather than a single number.
Berkus method. Dave Berkus assigns value for each element that reduces a startup's risk: a basic value for the idea, then up to a set amount each for reducing technology, execution, market and production risk. His original figure was $500,000 per element, for a pre-revenue value of up to $2 million (or $2.5 million after product rollout), and in 2016 he wrote that the amounts should be adjusted for the region and sector.Dave Berkus
Scorecard method. Bill Payne starts from the average pre-money valuation of comparable pre-revenue companies and adjusts it on seven weighted factors: management team 30%, size of the opportunity 25%, product/technology 15%, competitive environment 10%, marketing, sales channels and partnerships 10%, need for additional investment 5%, and other factors 5%.Bill Payne, Gust
Venture capital method. Described by William Sahlman and Daniel Scherlis at Harvard Business School in 1987, it starts from the company's expected value at exit and works back using the return the investor needs.Harvard Business School Bill Payne's example: a $42.5 million terminal value and a 20× target return give a $2.125 million post-money valuation, or $1.625 million pre-money after a $500,000 investment.Bill Payne, Gust
The formula
- Berkus: pre-money = Σ (score for each of five elements × maximum per element)
- Scorecard: pre-money = average comparable pre-money × Σ (factor weight × comparison with average)
- VC method: post-money = exit value × (1 − later dilution) ÷ target return multiple; pre-money = post-money − investment
Worked example
Under the Berkus method, a startup with a sound idea (full marks), a working prototype (80%), a good team (60%) and some partnerships (40%) but no sales yet is valued at $1,400,000.
| Line | Value |
|---|---|
| Sound idea (basic value, product risk) | $500,000 |
| Prototype (technology risk) | $400,000 |
| Quality management team (execution risk) | $300,000 |
| Strategic relationships (market risk) | $200,000 |
| Product rollout or sales (production risk) | $0 |
| Pre-money valuation | $1,400,000 |
Under the scorecard method, a startup whose team is 25% stronger and whose market is 50% larger than average, but whose competition is tougher (75%), against a $2 million average, is valued at $2,350,000. The VC method with Bill Payne's figures gives $1,625,000.
Assumptions and limitations
- Judgement in, number out. Each method turns opinions about the team, product and market into a figure; small changes in inputs move the result a lot.
- Pre-revenue companies. Once a startup has meaningful revenue, revenue multiples (see the SaaS valuation calculator) become more relevant.
- The final price is negotiated. Competition between investors, market conditions and terms such as liquidation preferences matter as much as the method.