STARTUP VALUATION – RATING METHOD
Most startup valuation models are designed for either pre-revenue, early-stage or later-stage companies, often limiting themselves to pure financial or qualitative approaches. How are we supposed to deal with similar companies in terms different team quality and business cases? Simply looking at numbers will not get us too far. Most plans show hockey stick growth in 2 to 5 years from now. The actual development will take longer, and cost more money.
TAKE INDIVIDUAL STRENGTHS AND WEAKNESSES INTO ACCOUNT
We need to take individual strengths and weaknesses into account. Team, market, product, technology and scaling strategy, will be different for companies. Having discovered this shortfall in existing startup valuation models, we developed the Venionaire Startup Rating Method.
COMPARE WITH OTHER METHODS
Existing models, like the First Chicago Method, Venture Capital Method, Scorecard Method or Berkus Method make it hard for us to compare companies. The do not consider individual strengths and weaknesses. For different stages of development we need to apply different methods. This often leads to quite large spreads in results. Investment analysts, managers and business angels will take results of such models as a basis for making decisions. Paid premiums or received discounts in comparison to the average valuation, will depend mostly on their gut feeling and negotiation skills.
ADVANTAGES OF STARTUP RATING MODEL
We at Venionaire like to say: “Valuation is an art based on experience”. Having this in mind, we have developed a proprietary model for investors. It can be applied across different stages. You are not limited to a pure qualitative or financial approach. The model adjusts the average valuation you have calculated or observed from the market, and makes it transparent how much you may consider to over- or underpay. We reduce the amount of gut feeling in your valuation and increase transparency. The Rating Method valuation will help you to be transparent and get a fair deal. Download our free excel calculator and see how the ‘Startup Rating Model’, by Venionaire Capital works.DOWNLOAD THE CALCULATOR
VENIONAIRE – STARTUP RATING
Our model follows the logic of a simple scorecard, while having some very important elements to it which allow it to get a better result and fit to your investment strategy. We found 6 ultimate drivers: Team, Market, Product & Business Model, Technology, Scalability and KPIs, which we always evaluate when looking at a deal.
HOW ITS DONE
Score all factors mentioned below for your specific company. Simply apply a value between 1 and 5, and write down arguments, which justify the specific score you gave. This proved to be very helpful, holding our team at a certain quality and transparency standard. Assumptions and implications become transparent. Considering that some of those factors are much more important in earlier stages of development. Others, will become more relevant in later stages. For this reason, we came up with a weighted-matrix for those value-drivers (see Table 1).
|PRE-SEED||SEED||SERIES A||SERIES B|
|PRODUCT & BUSINESS MODEL||10%||15%||20%||15%|
Multiplying each score with its stage-relevant weight, and summing up all those factors gives us a number which we translate into a rating:
VAAA – Very Strong company (Top 5%) within a certain industry, stage and region.
VAA – Strong company (Top 10%) with a certain industry, stage and region.
VA – Above Average, above a rating of 3,5.
V – Average, in line with comparable startups (average).
VR – Very Risky, key value drivers are considered weak
ER – Extremely Risky, investors would be advised to not invest at all.
As the last step, we only need to multiply the rating of each value driver with the average valuation, considering a premium or discount factor for each value driver. The average valuation will be adjusted and will let you calculate an entity value for your company.
EXPLORE – STARTUP VALUATION METHODS
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.