THE SCORECARD VALUATION METHOD
START-UP VALUATION
Have you heard about the Scorecard Valuation Method? It is a way of determining the value of a startup and can be seen as particularly useful by pre-seed and seed-stage investors. In this blog, we will describe the methodology, and explain how you can make a valuation calculation…
When offering personal capital for an equity share in a start-up, angel investors would usually put up anything from around £20,000 to £100,000. The valuation is the result of talks between the group of angel investors, and the entrepreneur, and so as an investor, and as a founder, it helps to have your own method of ascertaining the valuation.
Sometimes it feels too difficult to come to a valuation (and probably a SAFE/ASA or other methods to defer this step to a later stage are the best choice for you) but there is a relatively simple way to help you come up with a value for your start up: the Scorecard method.
SCORECARD VALUATION METHODOLOGY
The method is centred around the comparison with similar early-stage startup ventures, adjusting for the median valuation of companies which have been funded recently in the same geographical location and sector, in order to decide a pre-money valuation of the company (it is key that a comparison must be made between companies at a similar development stage).
After gathering this local and sector-specific data you are left with an average pre-money valuation: now it’s time to weigh the most important aspects that make your venture unique and adjust accordingly.
WEIGHING UP ALL FACTORS
A key stage in your research is assigning values to the different aspects that make up your company. As part of the Scorecard Valuation Method you consider and assign values for factors such as:
- management team strength (from 0% to 30%);
- product and technology involved (from 0% to 15%);
- competitive environment (from 0% to 10%);
- market opportunity size (from 0% to 25%);
- existing sales or marketing partnerships (from 0% to 10%);
- need for additional investment and other considerations (from 0% to 10%).
How important is the experience of the management team? Choose between 0% and 30%. How much is technology important for your business (and for the benchmark ventures you are considering)? Rate this on a scale between 0% and 15%, and so on…
MAKING A CALCULATION
Once you have entered and added up data related to all of these factors – stated as percentages – it’s time to compare your company to the others:
How much stronger is your team, your product, your partnerships?
If you believe they are average, assign a value of 100%; or more/less than that according to how much stronger/weaker your situation is. For example, the strength of sales or marketing partnerships might be 150% compared to the similar startup you had identified, but product or technology might be 80%.
Now you have two percentages: the market percentage (0% to 30%, 0% to 10%, etc) and the percentage you have assigned to your company (+100%). Multiply the two percentages and you will have a weighted value for each single key aspect of your venture.
Sum up the percentages associated with each factor and you will have a number to identify the strength of your company (more than 100% you are doing better than the market; less than 100% and you are doing worse than your average competitor).
Now multiply this percentage by the average valuation we’ve found earlier on and voilà: you have a very subjective, but still arguably sound valuation for your start-up.
WANT TO GIVE IT A TRY?
This is obviously just the beginning of valuing a company with the scorecard method. For our valuations at Matters2 we created an additional layer to standardise our methods. It involves a number of questions that we ask our startups to answer, and then, based on a set of predetermined criterias, we fine tune our in-house version of the scorecard method. Curious? You can download our questionnaire here: https://matters2.com/valuation/#questionnaire
ALTERNATIVES
You don’t feel it? Or simply you would like to root your valuation into more solid methods?
You can check out our articles on the Discounted Cash Flow Method, on SAFE/ASA alternatives or check out our partner Equidam.
Have a look at a more general overview of what valuations are or get in touch with us for a professional valuation.
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