How to Valuate startup using the Berkus Method.

Value your startup with the Berkus Method

The Berkus Method is a simple and convenient rule of thumb to estimate the value of your box. Dave Berkus, a renowned author, and business angel investor, designed it. It is meant for pre-revenue startups.?The starting point is: Can the box reach $20M in revenue by the fifth year of business? If yes, you can assess your box against the 5 key criteria for building boxes.

Value your startup with the Risk Factor Summation Method.

The Risk Factor Summation Method, or RFS Method, is a slightly more evolved version of the Berkus Method. First, you determine an initial value for your box. Then you adjust the said value for 12 risk factors inherent to box-building. The initial value is determined as the average value for a similar box in your area, and risk factors are modeled as multiples of $250k, ranging from $500k for a very low risk to -$500k for a very high risk.? It is meant for pre-revenue startups.

Value your startup with the Scorecard Valuation Method

The Scorecard Valuation Method is a more elaborate approach to the box valuation problem. It starts the same way as the RFS method, i.e.; you determine a base valuation for your box and then adjust the value for a particular set of criteria.? Nothing new, except that those criteria are themselves weighed up based on their impact on the project's overall success. It is meant for pre-revenue startups.

Value your startup with the Comparable Transactions Method

The Comparable Transactions Method is just a rule of three. Depending on the type of box you are building, you want to find an indicator that will be a good proxy for the value of your box. This indicator can be specific to your industry: Monthly Recurring Revenue (Saas), HR headcount (Interim), Number of outlets (Retail), Patent filed (Medtech/Biotech), Weekly Active Users, or WAU (Messengers). Most of the time, you can just take lines from the P&L: sales, gross margin, EBITDA, etc. It is meant for pre- and post-revenue startups.

Value your startups with the Book Value Method

The book value refers to the net worth of the company, i.e., the tangible assets of the box, i.e., the "hard parts" of the box. The Book Value Method is particularly irrelevant for startups as it focuses on the company's "tangible" value. In contrast, most startups focus on intangible assets: RD (for a biotech startup), user base and software development (for a Web startup), etc.

Value your startup with the Liquidation Value Method

Rarely good from a seller's perspective, the liquidation value is, as implied by its name, the valuation you apply to a company when it is going out of business. Practically, the liquidation value is the sum of the scrap value of all the company's tangible assets.

Value your startup with the Discounted Cash Flow method

If your box works well, it generates a certain amount of cash annually. Consequently, you could say that the current value of the box is the sum of all the future cash flows over the following years. And that is precisely the reasoning behind the DCF method.

Value your startup with the First Chicago Method

The First Chicago Method answers to a specific situation: what if your box has a small chance of becoming huge? How to assess this potential? The First Chicago Method (named after the late First Chicago Bank — if you ask) deals with this issue by making three valuations: a worst-case scenario (tiny box), a normal-case scenario (normal box), and a best-case scenario (big box). The First Chicago Method is meant for post-revenue startups.

Value your startup with the Venture Capital Method

As its name indicates, the Venture Capital Method stands from the investor's viewpoint. An investor is always looking for a specific return on investment, let's say 20x. Besides, according to industry standards, the investor thinks your box could be sold for $100M in 8 years. Based on those two elements, the investor can easily determine the maximum price he or she is willing to pay for investing in your box after adjusting for dilution.

And the best valuation method is…

The best valuation method is the one described by Pierre Entremont. He says you should start by defining your needs and then negotiate dilution. The optimal amount raised is the maximal amount which, in a given period, allows the last dollar raised to be more valuable to the company than harmful to the entrepreneur.?

Now you have a clue about how the startup valuation is done. If you enjoy this article, share and subscribe for more entrepreneurship tips.