Valuation

Determining the Value of Your Company

Applying a valuation to an early stage company is a tricky proposition.  Generally speaking, valuation increases as the company matures and begins to generate revenue.  Ultimately, startup valuations must be kept at a low enough amount to compensate for the extreme risk taken by the investor and to provide some opportunity for the investment to achieve at least a ten times increase in value over its life.  The Berkus Method, by Dave Berkus is often used by Angel investors to determine whether or not a company’s proposed valuation is in line with the market.  Straight forward and easy to understand, the Berkus Method assigns a value of $500,000 to each of the following existing elements of the startup –

  • Sound Idea (basic value, product risk)
  • Prototype (reducing  technology risk)
  • Quality Management Team (reducing execution risk)
  • Strategic relationships (reducing market risk and competitive risk)
  • Product Rollout or Sales (reducing financial or production risk)

It is important to note that the Berkus Method allows a maximum pre-money valuation of $2,000,000 for a pre-revenue company.  Read more about the Berkus Method here.



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