Pre Revenue Valuation

Scorecard Valuation Method - May 20th, 2021

For pre-revenue startups, some investors do not trust the revenue projections 5 years into the future. To overcome this challenge, these investors use a scorecard valuation method to value pre-revenue startups.

This method compares the target company to angel-funded startup ventures and adjusts the average valuation of recently funded companies in the region to establish a pre-money valuation of the target. Following are the few steps in this method:

I. Research for the average pre-money valuation of pre-revenue companies in the same region and same industry.

Pre-money valuation varies with the economy and with the competitive environment for startup ventures within a region. In most regions, the pre-money valuation does not vary significantly from one business sector to another.

II. Evaluate the start up on the following 7 critical factors and their weightage accordingly.

1. Management team - 30.0%
2. Size of the opportunity - 25.0%
3. Products/Technology - 15.0%
4. Competitive environment - 10.0%
5. Sales and marketing - 10.0%
6. Need for additional Funding/capital raising - 5.0%
7. Other risk (Competition) - 5.0%

III. Then assign a rating usually in the range of say 0.5 to 1.5 with 1 as a base for the normal requirement and arrives at the weighted average rating of the start-up.

IV. Multiply the rating factor with the average valuation

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