Valuation For Startups — 9 Methods Explained

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, then you adjust the value for a certain set of criteria. 

Nothing new, except that those criteria are themselves weighed up based on their impact on the overall success of the project.

It is meant for pre-revenue startups.

The Comparable Transactions Method is really 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.

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 is focused on the “tangible” value of the company, while most startups focus on intangible assets: RD (for a biotech startup), user base and software development (for a Web startup), etc.

Rarely good from a seller 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 tangible assets of the company.

If your box works well, it brings in a certain amount of cash every year. Consequently, you could say that the current value of the box is the sum of all the future cash flows over the next years. And that is exactly the reasoning behind the DCF 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), a best-case scenario (big box).

The First Chicago Method is meant for post-revenue startups.

As its name indicate, the Venture Capital Method stands from the viewpoint of the investor.

An investor is always looking for a specific return on investment, let’s say 20x. Besides, according to industry standards, the investor thinks that 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.

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 useful to the company than harmful to the entrepreneur.