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Pre-revenue startup valuation – Scorecard method
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.
What is the Scorecard Startup Valuation method?
The Scorecard method uses a combination of industry data and weighted percentages based on detailed quantitative analysis to come up with a realistic valuation. The method is split into four steps which we’ll look at individually.
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.
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.
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.
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.
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