Startup Valuations: More Art than Science?

Startup Valuation

“At the outset we would like to inform the readers that we have used representative numbers due to the privacy and confidentiality nature of the early start up deals and the numbers used are in line with the real market deals.”

Start Up

The market is flooded with startup ideas and unicorns coming out from each nook and corners of the world. Investors are pumping money into the startup and the business is getting scaled up exponentially. Great news…

But are the founders really enriched with the boom or they become a minority stake holder in their own entity. It’s a critical question. Institutionalized or organized growth of any early-stage startup requires capital and often supported by Venture capital investors or angel investors. They all come with their standard investment documentation and will have an internal assessment of what value the startup has today and even tomorrow at the time of their planned exit. Are these startup founders well informed about valuation and investment documentation? May be yes may no.

Here we cover few commonly used startup valuation methods and we will touch base on some important aspects every startup should be mindful about while approaching the market for capital.

Critical areas requiring special consideration is presented in the chart below

Valuation largely depends up on the above critical areas and it requires special attention from the startup promoters. It would be better to seek the help of some professional incubator or accelerators from the region if the promoters group lacks the competence in all these critical areas. Without clear preparation on all of these areas a startup may not be in a position to assess the real potential of the venture and its value generation capacity. This will result in delays in capital infusion or excessive dilution. The startup should be mindful about the timing of approaching the capital and it is not only dependent up on the requirement but also on the recurrence of revenue, its scalability and probability of revenue jump with existing effort. All these needs to be assessed to get a better valuation.


Strat up funding

Once the ideation stage is completed, the white paper is done and boots are strapped with a minimum viable product, the startup can approach external market for investments. normal funding series and its requirements are given in the chart below.

  Pre seed and seed Round       Serie A       Serie B       Serie C  
  Used for initial setup and ideation, normally sourced from internal resources such as friends and families and are generally repaid after external capital is secured. A minimum viable product will be ready to launch into the market.       Normally external capital sourcing start from this round and the valuation of the company is more unstructured as the recurring revenue stage is yet to reach. The start-up should consider their total addressable market, Serviceable Operational Market and Serviceable Available market (TAM, SAM, SOM) before series A       Recurring revenue stream is stabilised and the start-up wants to develop its income stream and increase the share of immediate serviceable market share.       The start-up wants to increase the geographical reach and exponentially grow the top line and improve the contribution margin. Product diversification is possible during this stage. Capitalising on the brand equity, the start-up seeks strategic partnership with stable & long-term investors who normally continues even after IPOs.  


  Pre seed and seed Round   Serie A   Serie B   Serie C
Usage Initial set up cost and for developing a minimum viable product   Infrastructure Build-up & marketing, Brand Building   Target Customer Acquisition, A&P costs and possible small Acquisitions   Target Customer Acquisition, A& P costs, investment in infrastructure for Growth, Product diversification, Mid-size acquisitions
Timing Three to Six Months (depends up the team Strength)   Six Months to One year (depends up on the Requirement)   Six Months to One year (depends up on the Usage, Unit cost matrix improvement and top line)   One year to one half year (depends upon the Requirement size, Recurring Revenue & contribution margin)
Size $250K to $500 K (Depends up on the product type)   $1.5 M to $2.5M (Depends up on Scalability & Future Growth)   $5 M to $15M (Depends up on Scalability & Future Growth)   $25 M to $50 M (Depends up on Scalability & Future Growth and brand equity)
Valuation Methods 1. Berkus Method                                                             2. Score Card Method                                    3. Risk Summation Factor Method                                      4.  Cost to Duplicate Method



  1. Berkus Method                                                             2. Score Card Method                                                 3. Risk Summation Factor Method                                    4. Cost to Duplicate Method                                      5. VC Valuation Method   1. Cost to Duplicate Method                                    2. VC Valuation Method                                       3. DCF Method                                                       4. Market Multiple method   1. VC Valuation Method                                            2. DCF Method                                                            3. Market Multiple method
Core areas to be considered and assessed before going to the market 1. Initial team strength & competence                                2. Understanding about the viability of the product                                                             3. Initial Cost to build and test the viable product                                                            4. Legal & Statutory approvals and Compliances                                                      5. Intellectual property registration   1.  Team strength & competence                                2. Serviceable Market                                                   3. Valuation                                                                   4. Investment instrument & its documentation                       5. Brand promotion costs                                           6. Strategic Investor negotiations   1.  Management Composition                              2. Serviceable Market                                              3. Valuation                                                            4. investment instrument documentation                       5. Target Customer acquisition costs                     6. Strategic partnerships                                      7. Revenue Mix and its growth   1.  Management Profile                                             2. Serviceable Market                                                3. Valuation                                                                 4. Investment documentation                                 5. Target Customer acquisition costs                                          6. Strategic partnerships                                           7. Contribution Margin                                               8. Top line growth potential


Early-stage Startup Valuation Methods

  1. Berkus Method: – The basic assumption under Berkus method is that if we are going to invest our resources and energy into a project, then that project is worth something. The method assigns qualitative measuring elements to a project and then give specific values to each of the quality points, rating is purely  based on its criticality to the project development. The sum total of these assigned values is taken as the value of the start-up. Once the entity starts generating revenue Berkus method is not generally used.



  1. Score Card Method: – It is very similar to the Berkus method and additionally, it looks for the requirements of additional investments. This method gives higher values / points to the strength of the team behind the idea and the size of the serviceable market for the product.
  2. Risk Summation Factor Method: – The method looks into the various risks associated with the enterprise and sees how well the company is positioned to mitigate the risk. Then based on this assessment, specific rates are assigned to each risk. Each rate is pre assigned with a value, which will be weighted with the rates.

The valuer has to find out a pre money / pre revenue value of a similar entity from the same industry and the net value arrived using risk factor summation sheet will be adjusted to get the pre money value of the start-up.    For the above assumed risk factors, the risk factor summation sheet will be as follows (Positive +1, Highly positive +2, Negative -1, Highly negative -2, Risk Neutral   0, Value per rate is assumed to be $ 250 K)

Risk Rates Assigned Adhoc. Values/ Rate ($) Net Value ($)
 •Management Risk  2  2,50,000  5,00,000
 •Capital Sourcing Risk  2  2,50,000  5,00,000
 •Product Development Risk 0  2,50,000  –
 •Technology Risk  -2  2,50,000  -5,00,000
 •Risk associated with the Stages of Start-up enterprise 0  2,50,000  –
 •Risk associated with Competition  1  2,50,000  2,50,000
 •Marketing & Customer Retention risk  1  2,50,000  2,50,000
 •Risk of changes in legislation or political risk  -1  2,50,000  -2,50,000
 •Risk of litigation 0  2,50,000  –
 •International Business Risk 0  2,50,000  –
 •Reputational Risk 0  2,50,000  –
 •Risk of Exiting the venture  -2  2,50,000  -5,00,000
Net value as per the risk factor summation sheet  2,50,000

Note: – Rate and Adhoc values are assumed values

Estimated pre money / Pre-Revenue value of an enterprise from the same industry $ 1,000,000
Add/ Less: – Value from Risk factor Summation Sheet $     250,000
Pre Money-Valuation of the start-up entity $ 1, 250,000


  1. Cost to Duplicate Method: – The method simply sums up the investments into the tangible assets of the start up and assumes that any investor would be required to invest a minimum of total investments made in to the tangible assets. This method ignores investments in to intangibles and future cash flow generation potential.
  2. VC Valuation Method: – Venture capital investors and angel investors widely use the above four methods which are predominantly qualitative in nature when they want to assess the entity from its qualitative aspects such as strength of management, requirements of additional capital and various risks and its mitigation protentional. VC method is more a quantitative approach to value an early-stage start-up and is widely used by angel investors.

Pre Money-Value of the entity = Post money value as per VC method – Investment sought

Pre Money value of the entity is computed using comparable company exit multiple. If suppose the entity is looking for a series round of $ 500K and the average peer company expected exit multiple (EV / Sales) is 2 times and the average revenue of the established companies in the same sector is $ 20 M and the return expected by the investor is 20 times of his investments. The post money valuation will be computed as follows

Post money value of the start up = Exit value of the start up / Expected return on investment (multiple)

Exit value is usually taken as two times of the average revenue ( this is the normal market practice applied for the  tech based entities) of the established entities in the industry.

Average Sales volume of the established entities in the industry $ 20 M
Average Exit Value of the start-up expected (2 times of the average comparable company sales) $ 40 M
Expected return on investment by the investors (multiple) 20 times
Average post money value of the start-up (Exit value / Expected return multiple) $ 2.0 M
Less: – Investment asked in the present round $ 500 K
Estimated Pre Money value of the start up $ 1.5 M


Since the sales data of the startup is not representative of its value, the angel investors usually look for an average sales value of established entities in the sector and generally an exit multiple of 2 times is applied to the current average sales of the comparable companies to arrive at the exit value.

The VC method is ideally computing the PV of the terminal value. The exit value computed is nothing but expected terminal value of the entity at the end of the assumed terminal / explicit / exit date. Since the start up is yet to generate positive cash flows, explicit period cash flows are taken as zero, so that the terminal value will be the exit value at the end of expected explicit period. it has to be brought back to the present value. For that the VC method uses the expected average return multiple of the investor.

Exit value = Present Post money value * Current Expected return multiple

So, the present Post money value = Exit value (or Terminal value) / Expected return multiple of the investor.

The investment sought in the present round is reduced to get the pre money value of the startup entity. VC  method can also be represented as below for easy understanding

Average sales value of comparable companies in the sector $ 20M
Average exit multiple expected in the sector (EV / Sales) 2 times
Terminal value (average sales* Average Sales multiple in the sector) $ 40 M
Cash flow during the period to expected exit date (explicit period) $ 0.0 M
Total Exit value at the end of explicit period $ 40 M
Average Expected return on investment by the investor 20 times
Present value (Exit value / Return Multiple) $ 2.0 M
Post money value $ 2.0 M
Less: – Investment / Ask during the series $ 500 K
Pre Money value $ 1.5 M



Early-stage startup valuations are completely different from the valuation of an established entity. The absence of comparable company data also makes it very much complex. The angel or venture capital investors usually uses a mix of all the five methods to arrive at the value of the startup entity. The start up promoters should be mindful about all these points before approaching the market for money during any stages of the start up entity.

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