Valuation of Start-ups – The Scorecard Valuation Method
In continuation of our previous article on valuation of start-ups, here is another method which is commonly used by angel investors to value pre-revenue start-ups.
The method is known as the Scorecard Valuation method and the key elements of the method are as follows:
- An average pre-money pre revenue valuation of other start-ups in the region.
- A rating or assessment of the start-up by the investor on 7 critical factors.
The method critically compares the start up in question with other start-ups in the region which have been able to raise funds at similar stage. The first step to valuation using this methodology is to arrive at an average pre-money valuation of the start-ups in the region. While taking the average, care should be taken to remove the outliers so that the average is not too skewed. This can also be cross verified by taking the median and mode of the data available. The data selected should be recent period preferably of last 6 months or 1 year max.
Say for a set of such deals the average derived is $1.25 million.
Now the second step is to evaluate the start up on the following 7 critical factors and their weightage accordingly
|Strength of Management Team||30%|
|Size of Opportunity||25%|
|Products and Technology||15%|
|Marketing and Sales Channels/ Partnerships||10%|
|Need for additional funding||5%|
The angel investor then assigns a rating usually in the range of say 0.5 to 1.5 with 1 as a base for the normal requirement and arrives at the weighted average rating of the start-up.
Suppose the investor assigns the following ratings to the start-up.
|Strength of Management Team||30%||1.3||0.39|
|Size of Opportunity||25%||1.5||0.375|
|Products and Technology||15%||1.0||0.15|
|Marketing and Sales Channels/ Partnerships||10%||0.5||0.05|
|Need for additional funding||5%||1.1||0.055|
|Total weighted average rating||1.15|
The third step will be to multiply the rating factor with the average valuation = 1.15*1.25 = 1.4
Hence, the pre-money valuation of the start-up will be $1.4 million.
Keep reading for more methods.