In continuation to my previous article regarding the valuation of a pre-revenue startup. As I mentioned, five key parameters are considered for the Berkus method. Each parameter brings a valuation of $500,000 to the startup.
I will dive deep into the Berkus method's first parameter, "Soundness of Idea," for this article.
An idea is a derivative of the startup founder. An idea should solve the unsolved problems for the mass. An idea is the building roadblock for any startup. But nowadays, most people think ideas are worthless, and execution of an Idea is essential. But the startup's valuation should also reflect the value of the Idea.
How does an incubator assign value to the Idea of a startup? As per Berkus Method, an idea can be valued at $0 to $0.5M. There are five critical aspects of an idea, each with a weightage of $0 to $0.1M. Those five key aspects are:
- Proprietariness of the Idea: A business idea can be protected via patents or copyrights. This will increase the Idea's scope, increase future returns, and protect against competitors. If Idea has some proprietariness, it'll bring the startup a $0.1M valuation.
- Lifecycle of the Idea: An investor or incubator understands an idea and compares it with the industry's lifecycle. If an idea comes out during the early stages of the lifecycle, it brings more value to initial investors, so another $0.1M.
- Scalability of the Idea: To scale any idea to cater to a mass audience, one needs to minimize the incremental costs per new user or customer. A startup should also look out for competition in the market. If Idea seems scalable, it brings another $0.1M to the table.
- Social and political prevalence: A user or a customer looks at an idea of the startup through the lens of social and political norms. If an idea doesn't hinder or change social or political norms, it adds $0.1M to the valuation.
- Validation of the Idea: An idea must be validated before going to the market. Here validation means appeal to a larger audience. If an idea is validated through experimentation with a mass market, it will bring the last $0.1M to the startup's valuation.
Please lay down your thoughts for me in the comment section.
For the following article, I'll discuss other parameters of the Berkus Method.
