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.