Funding Fridays: The Berkus Method of Valuing Startups

 Image credit: http://www.svth.com.au/

Image credit: http://www.svth.com.au/

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.

Short version: 

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...

The full version is well worth a read. 

This post is a part of Funding Fridays, an occasional series on best practices in raising funding.