Valuing a startup without any existing revenue can be difficult. So difficult in fact that most Venture Capitalists and Angel Investors admit that a certain degree of subjectivity and experience must be used. The value of such a company cannot be determined using the traditional methods of financial projections and quantitative analysis.
To solve the problem many larger Angel investors have developed sophisticated algorithms to come up with a realistic valuation. But what if you don’t have access to such a tool? Well, a number of third-party valuation methods have been devised with the Scorecard method being one of the most popular.
The Scorecard method uses a combination of industry data and weighted percentages based on detailed quantitative analysis to come up with a realistic valuation.
What is the Scorecard Start-up Valuation method?
The Scorecard method was devised by Angel Investor Bill Payne (US Angel Investor of the year 2009). He first published this startup valuation method in his book, The Definitive Guide to Raising Money from Angles, released in 2011. The method is split into four steps which we’ll look at individually.
Before doing anything else you need to establish a pre-money valuation for existing businesses in the same location and sector. Both of these factors can have a significant effect on the overall value of the business. Competition for investors and the limited number of good ideas available can inflate the value of startups in some regions. So thorough research needs to be carried out into both the industry and the location of the business to ensure you get a realistic valuation. AngleList and CrunchBase are good places to get accurate startup valuation data. Search each site for the top 10 startup companies in your industry and filter the data by location. Simply add up the pre-money valuation of each and divide by 10. For this example, let’s say the industry average pre-money valuation is $1.5 million.
Now you need to compare your startup with the perception of other startups in the same industry and region. Payne recommends the following factors are assessed and weighted.
Strength of the Management Team (0-30%)
The management team should be complete and consist of experienced, knowledgeable and coachable people. A better management team would lead to a higher valuation of your startup.
Size of the Opportunity (0-25%)
The size of the market should be assessed and realistic market share targets should be set. If the size of the market is too low, it would have a negative impact on your startup valuation.
Product/Technology (0-15%)
The intellectual property (IP) and traction of the company should be well defined. Some investors put traction (the ability and speed with which you can generate new customers) ahead of IP when evaluating startups. If your product has a clear competitive edge and you can demonstrate the ability to generate traction – you can raise your startup funding at a better valuation.
Competitive Environment (0-10%)
The competitive environment should also be thoroughly analysed. The barriers to entry, average operating profits for the industry and the projected growth of the industry should all be assessed. If the barriers to entry in your market are low, this will have a negative impact on your startup valuation.
Marketing/Sales Channels/Partnerships (0-10%)
The company should have detailed marketing plans along with identified sales channels and partnerships which can be leveraged to create new business. If you can demonstrate that you have already worked out your sales channels and developed relevant partnerships – you can increase your valuation by 10%.
Need for Additional Investment (0-5%)
Will the company require any additional investment from Angel investors or Venture Capitalists? If yes, this should be assessed and the amounts required should be factored into the valuation. The money you raise should be able to take you to the next round.
Other (0-5%)
You should also take into account any other factors which may influence the valuation. The geographical location, the maturity of the market and any feedback from early adopters or beta users fall into this category.
Now we need to bring everything together and calculate the percentage weights for our business and compare them with a percentage for a business in the same sector and preferably location. Payne devised the following table which we have filled in with speculative data to show how this is done.
| Comparison Factor | Weight % | Comparison % | Factor = (WxC) |
|---|---|---|---|
| Strength of team | 30% | 100% | 0.3000 |
| Size of opportunity | 25% | 125% | 0.3125 |
| Product/technology | 15% | 150% | 0.2250 |
| Competitive environment | 10% | 75% | 0.0750 |
| Marketing/sales/partnerships | 10% | 100% | 0.1000 |
| Need for additional investment | 5% | 100% | 0.0500 |
| Other factors | 5% | 125% | 0.0625 |
| SUM | 0.0625 |
In the above example, the management team has been assessed to be strong and weighted with the full percentage (30%). The market opportunity is also seen to be favourable and this has also been given the full percentage (25%). However, the company is also competing in a highly competitive environment (10%) which could restrict growth and put pressure on margins.
Finally, we are ready to get a valuation for our business. Take the sum of the factors from the table above (1.1250) and multiply it by the industry average pre-money valuation identified in step one ($1.5 million). The resulting valuation for our startup is $1.6875 million.
While the Scorecard method still requires a degree of subjectivity on behalf of the investor it does provide a solid foundation for the valuation of pre-money startups. The method also ensures founders carry out good industry research and commit to an honest and introspective understanding of their own abilities before seeking capital.
If you are an early stage startup and would like an idea of how much your business could be worth. Use our Free startup valuation calculator. Alternatively, if you would like more information about how we can transform your innovative app idea into a successful mobile application. Contact our development team here .