Brushes Matters2

Valuation - Qualitative Methods

SCORECARD METHOD VS. CHECKLIST METHOD

When looking at early-stage valuations, our favourite approach is to rely on benchmarks from the market and then compare them with the start-up we are valuing. We normally arrive at a final value by using two different methods: the ‘scorecard’ and the ‘checklist’ methods. Both techniques identify their benchmark in a given market, and then weigh in different criterias and adjust the final value accordingly. The main difference between the scorecard and checklist method is that the former uses the average valuation of start-ups in a certain market, while the latter takes into consideration the maximum value recorded in the same environment (excluding outliers).

SCORECARD METHOD

The scorecard method was conceived by William H. Payne of Ohio TechAngels group when he faced the decade old question of how to value early-stage businesses. The valuation of the company depends on how its characteristics differ from the average of comparable companies. Obviously, different markets and different ecosystems have different levels of valuations, so this method needs to take into account different geographic benchmarks.

The qualitative traits of each start-up are divided into 6 criteria and then they are given a score, in percentage, according to whether they are better or worse than your average company. 

The criteria that the method takes into consideration are the strength of the team, the size of the opportunity, the strength and protection of the product or service, the competitive environment, the strategic relationships with partners, and the funding required.

In our calculations, we assume a score of 50% for a company that perfectly represents the average performance in each criterion, and 100% for the top performers. We then compare the results with the benchmark valuation of the average company in our market of reference and multiply them by set weights that represent the impact of each criterion on the valuation.

WEIGHTS OF EACH CRITERIA

Not all of the criteria that are being analysed have the same weight in the Scorecard Method. This is how we are weighting the different aspects:

  • Strength of the team: 30% 
  • Size of the Opportunity: 25% 
  • Strength and protection of the product/service: 15% 
  • Competitive Environment: 10% 
  • Strategic relationships with partners: 10% 
  • Funding required: 10%

The sum of these weighted scores multiplied by the average valuation leads to the company’s pre-money valuation.

Brushes Matters2

CHECKLIST METHOD

The creator of this method is David W. Berkus, one of the most prominent Californian angel investors and venture capitalists. The checklist method uses building blocks that sum up to a maximum pre-money valuation. This maximum is composed of 5 different criteria that are weighted differently according to their importance. The company is awarded portions of these maximum criteria valuations according to how close its qualitative traits are to the most desirable ones. These values are then compared to the benchmark valuation in the specific market that is being analysed.

The criteria that the method takes into consideration are the quality of the core team, quality of the idea, product roll-out and IP protection, strategic relationships and operating stage.

As in the scorecard method, for this technique, we assume a score of 100% for the top perfomers and one of 50% for a company that represents an average performance. The main difference with the previous methodology is that, in the checklist method, we compare the results with the highest valuation in our benchmark, instead of its average. We assign a score to each criterionand then multiply them by weights that represent the impact of each criterion on the final valuation. The result is deducted from a maximum valuation recorded on the market, with the notable exclusion of outliers and peculiar or abnormal examples.

WEIGHTS OF THE CRITERIA

This is how we are weighting the different aspects of the checklist method:

  • Quality of the core team: 30% 
  • Quality of the idea: 20% 
  • Product roll-out and IP protection: 15% 
  • Strategic Relationships: 15% 
  • Operating Stage: 20%

These weighted scores multiplied by the maximum valuation of every single criteria lead to the company’s pre-money valuation.

WHAT ABOUT NO VALUATION AT ALL?

There are other methods to solve the problem of early- stage valuations. One is to skip it entirely: have you ever heard of Convertible Notes? In this case, you might want to have a look at our article on SAFE/ASA agreements.

WHERE CAN I GET A VALUATION FOR MY COMPANY?

We can help you in two ways:

  • We partnered with Equidam and you can follow our affiliate link that will offer you a 15% discount on their valuations.
  • Or you can contact us and we will tailor a valuation to your specific needs. You can check our prices here.

Don’t hesitate to get in touch with us if you want more details about valuations and our services.

Brushes Matters2

SUBSCRIBE TO OUR NEWSLETTER
TO RECEIVE UPDATES ON NEW ARTICLES

a good amount of stress Matters2

Good Stress Vs Bad Stress

Honestly, not all stress is bad! Feeling stressed can be good for you in small doses... There is such a thing as good stress (which is also known as eustress) and...
Zzinga Autumn

Zzinga

We think the UK market is ready for this delicious honey cider and we are excited to share the news that Zzinga is launching in the UK with a production set up…
Crowdfunding Video ok Matters2

The Crowdfunding Video

Crowdfunding: you put together a video, ready to let your idea off into the investment stratosphere. But what goes in the video?
ideas matters2

Ideas Are In The Air

Successful businesses are usually borne out of one simple thing: a fantastic idea. But ideas belong to everyone. When the ground is ready for new ideas...
Cake Matters2

Slicing The Pie

When it comes to your start-up, you want to ensure complete equality of equity. Finances are of the utmost importance, and it's essential you find a way of fairly and impartially determining…
pessimism and optimism matters2

The Optimist/Pessimist Founder

If you are embarking on a new start-up project, one of the most useful things you can do is trying to control your positive/negative outlook on the world. Both attitudes can help…
Brushes Matters2

Valuation: Qualitative Methods

When looking at early-stage valuations, our favourite approach is to rely on benchmarks from the market and then compare them with the start-up we are valuing. We normally arrive at a final…
Lehman Brothers in 1957

Lehman Scale

LEHMAN FORMULA So, let’s address the elephant in the room first: the Lehman Scale takes its name from the infamous Lehman Brothers that developed this method in the late 1960s to bring…

SUBSCRIBE TO OUR NEWSLETTER
TO RECEIVE UPDATES ON NEW ARTICLES

Leave a Reply

Your email address will not be published.Required fields are marked *