Valuation, the "sticker price" for your venture, is a topic fraught with emotional landmines for both entrepreneurs and investors. The fact that startups are pretty much all hope & dreams and very little substance makes MBA-style valuation techniques useless. So what to do?
Dave Berkus, one of the most successful and respected angel investors in the world, has a method that has found strong support from Silicon Valley to the East Cost.
You should be able to adopt it to most any kind of business enterprise, if your aim is to establish an early, most often pre-revenue valuation to a start-up that has potential of reaching over $20 million in revenues within five years:
If Exists: Add to Company Value up to:
1. Sound Idea (basic value, product risk) $1/2 million
2. Prototype (reducing technology risk) $1/2 million
3. Quality Management Team (reducing execution risk) $1/2 million
4. Strategic relationships (reducing market risk and competitive risk) $1/2 million
5. Product Rollout or Sales (reducing financial or production risk) $1/2 million
Note that these numbers are maximums that can be “earned” to form a valuation, allowing for a pre-revenue valuation of up to $2 million (or a post rollout value of up to $2.5 million), but certainly also allowing the investor to put much lower values into each test, resulting in valuations well below that amount...
This post is a part of Funding Fridays, an occasional series on best practices in raising funding.