EARLY-STAGE STARTUP VALUATION – PART 1

THE PAYNE SCORECARD METHOD

In previous articles, we have explained the First Chicago Method and the Venture Capital Method as two possible models for startup valuation. These two methods rely on calculations, which are commonly applied for revenue generating startups. In pre-revenue companies, there is less visibility on numbers. Therefore, other methods, such as the Berkus Method (coming soon) or the Payne Scorecard Method apply.

Startup valuation is an art based on experience, as we like to say. Pre-seed companies sometimes do not even have a minimal viable product yet, their business case is an idea and likely to be changed quite frequently during the first 18 to 24 months until a first product market fit is tested. Numbers and financial plans are worth nothing at this stage. Yet, there are valuation models Business angels use to evaluate such early-stage startups. The most prominent method one is the ‘Scorecard Method’. Developed by Bill Payne, this top-down approach compares a startup to other typical startups at the same stage (investors benchmark the “standard” value of a pre-seed or early-seed company in this case), within a geographic region and startup-sector (regtech, digital health, fintech, SaaS, etc.).

THE PAYNE SCORECARD METHOD CAN BE BROKEN DOWN INTO 3 STEPS:

STEP 1- AVERAGE STARTUP VALUATION (BENCHMARK)

In the first step, we need to understand the average valuation of similar startups within our region. Looking into databases such as Crunchbase or AngelList or asking Angel Clubs might help to get a better understanding. Be aware that markets are dynamic, meaning those prices will change over time – the recent crisis had quite an impact on valuations for example. We recommend to gather as much data as possible on recent investments in startups, within the same industry, geographical region and stage.  Below we calculated an example of average valuations by fictitious angel groups and investors of startups that fit the required criteria:

Pre-Money Valuations*
Investor€ 1,20
A Capital€ 1,15
B Capital€ 1,50
C Capital€ 1,45
D Capital€ 1,29
A Ventures€ 1,30
B Ventures€ 1,20
C Ventures€ 1,80
ABC Angel€ 1,55
XYZ Group€ 1,22
Average (mean)€ 1,37
*in Millions of €

STEP 2- DETERMINE FACTORS

In the next step, we apply weights to the following factors. Those weights vary depending on each individual investor – some will value the quality of the founder team higher, others the size of the market opportunity. Below we give you an example with random weights:

Management Team
How experienced are the founders, single founder / team,
are the founders e.g. serial entrepreneurs?
30%
Timing of the Opportunity
Is the market ready yet – too late / too early?
20%
Size of the Opportunity
Target market, first mover? Scalability?
20%
Product / Technology
Easy to copy? Barriers to entry? IP?
15%
Competitive Environment
How many competitors? Their strength?
5%
Marketing/Sales Channels/Partnerships
Go-to-market strategy, sales contracts signed?
5%
Other
Hiring capabilities, Access to funds, etc.
5%

Note: It is generally accepted that a strong, experienced team of serial entrepreneurs is one of the most crucial determinants of success. We tend to look at an additional factor – “timing”, which has scientifically been proven to be highly a significant success-factor of a venture. The market size and product/technology are considered staples as well – especially for investors with the ability to leverage those factors, as they may provide an easier access to market or similar. Each investor is free to define specific criteria which deem to be relevant to them as well.

STEP 3 – START THE VALUATION CALCULATION

The last step of the Payne Scorecard startup valuation method is simply assigning scores to the respective categories, defined in the previous step. The norm for the assumption is 100%. A score of 120% represents a higher-than-average assessment, while 80% represents a lower-than-average assessment. Lastly, we just need to multiply the assigned scores with their respective weights to get the factors.

ParametersWeightingAssumption
Start Up
Factor
Management Team30%126%0,378
Timing of the Opportunity20%140%0,28
Size of the Opportunity20%90%0,18
Product / Technology15%65%0,0975
Competitive Environment5%95%0,0475
Marketing/Sales Channels/Partnerships5%100%0,05
Other5%80%0,04
Total1,07

Summing up all the factors gets us the final number, which is the ratio of the valuation of our startup compared to the average (benchmark). In our example, the valuation of the startup we are evaluating is 7% higher than the average of its peers. In other words, our startup is worth 1.37 * 1.07 = 1.47 million euros. This valuation usually goes hand in hand with standard venture-terms, which hedge risks for investors at early-stage investments significantly (see https://www.venionaire.com/venture-valuation/). We always recommend considering valuation and terms together to understand the full picture (pricing) of an offer – those to factors need to be balanced well.

This valuation method by Payne reflects his mission to take more factors into consideration than the simpler Berkus method (explained in detail in our upcoming article).

EXPLORE – STARTUP VALUATION METHODS

Berkus MethodRating MethodVenture Capital Method

Berthold Baurek-Karlic is Founder and CEO of Venionaire Capital, with many years of experience as a serial entrepreneur, corporate finance expert and early-stage investor. He supports the startup ecosystem in various roles such as President of the European Super Angels Club, Board of Austrian Private Equity and Venture Capital Association and General Secretary of Business Angel Institute.

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