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Angel Investor Methods
Investors have developed multiple valuation strategies to account for the difficulty in assessing the value of early-stage, growth-based startups in the technology space. Two well-known methods are the “Berkus Method” and the “Scorecard Method”.
The Berkus method was developed by a well-known angel investor named Dave Berkus. The Berkus method values a business venture based upon value drivers. The value drivers are soundness of the business idea, quality or existence of a product prototype, quality of the business management team, strategic relationships in the market, and existing product sales. The extent or development of each of these value drivers adds to the pre-money valuation of a venture. Generally, each driver will account for between zero ($0) and five hundred thousand ($500,000) of value to the business. The idea is that each value driver increased the likelihood that the firm will meet intended goals and reduces the risk of failure.
For a full explanation of the Berkus Method.
The Scorecard Method, also known as the Benchmark Method, was created by a well-known angel investor name Bill Payne. This method derives a valuation by comparing a pre-revenue business venture to other ventures in the same business sector or region. It relies on the ability to determine the valuation of other entities and average those valuations to arrive at a benchmark. One then compares the business venture to those average ventures based upon: the strength of the management team; the size of the business opportunity; the product or technology at the center of the business; the competitive environment of the business; the existing marketing or sales channels; the need for capital, and other investment specific information. Each of these factors is attributed a percentage, with 100% being average. If the business is strong in a given area, then it would be rated as higher than 100%. If it is less than average, it would be below 100%. Each of these factors is then ascribed a weight that totals 100 or 100%. Multiplying the assessed percentage by the ascribed weigh provides a value factor. Multiplying the resulting value factor by an average pre-money valuation from similar businesses provides a valuation for the target business. The salient issue with this method is that it relies heavily on identifying comparable firms.
For a full explanation of the Scorecard Method.