Startup Valuation Methods
Startup Intelligence · Startup Funding Library · Startup Valuation
Startup Valuation Methods
Last Updated | November 11, 2026
Early-stage companies have little revenue and no profit, so there are no cash flows to discount. Investors rely on structured heuristics instead: the Berkus Method, the Scorecard Method, Risk Factor Summation, the VC Method, the First Chicago Method, and comparables. This page explains how each works, with worked numbers, and when to use which.
No method produces "the" value of a startup. Each one gives a defensible range. In practice, the final price is set by negotiation, competing offers, and what comparable companies raised. Use two or three methods and triangulate.
Method overview
| Method | Best for | Core idea | Main weakness |
|---|---|---|---|
| Berkus | Pre-revenue, pre-seed | Assign a dollar value to five risk-reducing milestones | Fixed caps ignore market conditions |
| Scorecard | Pre-seed, seed | Adjust a regional average valuation by weighted factors | Needs a good local average to start from |
| Risk Factor Summation | Pre-seed, seed | Add or subtract from a base value across 12 risks | Step size is arbitrary |
| VC Method | Seed through Series B | Work backward from an exit value and target return | Very sensitive to the exit assumption |
| First Chicago | Seed and later | Probability-weight success, base, and failure scenarios | Probabilities are judgment calls |
| Comparables | Any stage with data | Price off similar companies' rounds or multiples | Round prices reflect negotiation, not intrinsic value |
1. Berkus Method
Developed by angel investor Dave Berkus for pre-revenue companies. It assigns up to roughly $500,000 to each of five factors that reduce a different kind of risk. The original version capped the total pre-money value at about $2 million to $2.5 million, depending on the version used.
| Factor | Risk it reduces | Max value |
|---|---|---|
| Sound idea (basic value) | Market or opportunity risk | $500,000 |
| Prototype | Technology risk | $500,000 |
| Quality management team | Execution risk | $500,000 |
| Strategic relationships | Competitive and market-entry risk | $500,000 |
| Product rollout or sales | Production and sales risk | $500,000 |
Example: A team with a clear idea ($400k), a working prototype ($350k), a strong team ($450k), and no partners or sales yet ($0) gets a pre-money value of $1.2 million.
2. Scorecard Method
Popularized by Bill Payne in the angel investing community. Start with the average pre-money valuation of comparable pre-revenue companies in the same region and stage, then score the target company against that average using weighted factors.
| Factor | Typical weight | Vs. average | Weighted |
|---|---|---|---|
| Strength of the team | 30% | 125% | 37.5% |
| Size of the opportunity | 25% | 100% | 25.0% |
| Product or technology | 15% | 90% | 13.5% |
| Competitive environment | 10% | 80% | 8.0% |
| Marketing, sales channels, partnerships | 10% | 100% | 10.0% |
| Need for additional investment | 5% | 100% | 5.0% |
| Other factors | 5% | 100% | 5.0% |
| Combined factor | 104.0% | ||
Example: If comparable companies average a $6.0 million pre-money valuation, the target is worth 6.0 × 1.04 = $6.24 million.
3. Risk Factor Summation
An extension of the Scorecard idea. Start with a base valuation, then rate 12 risk factors from -2 (very negative) to +2 (very positive). Each step moves the value by a fixed amount, commonly $250,000.
The 12 factors: management, stage of the business, legislation and political risk, manufacturing risk, sales and marketing risk, funding and capital-raising risk, competition, technology, litigation, international risk, reputation, and potential for a lucrative exit.
Example: Base value $3.0 million. Net rating across all 12 factors is +3. Adjustment: 3 × $250,000 = +$750,000. Pre-money value: $3.75 million.
4. Venture Capital (VC) Method
Popularized in venture education through work by William Sahlman and others. It starts at the exit and works backward using the return the fund needs.
Pre-money today = Post-money − Investment
Retention ratio = 1 − expected dilution from future rounds
Example: A fund invests $2 million. It believes the company can exit for $200 million in 7 years and wants a 10x return. It expects future rounds to dilute it by 40%, so retention is 60%.
- Post-money today = ($200M × 0.60) ÷ 10 = $12 million
- Pre-money today = $12M − $2M = $10 million
- Ownership needed today = $2M ÷ $12M = 16.7%, which dilutes to 10% at exit and returns $20M (10x)
Because the result scales directly with the exit assumption, doubling the assumed exit doubles the valuation. Treat the output as a sanity check on the price, not proof of it.
5. First Chicago Method
Named after the venture group at First Chicago. Instead of a single exit case, it models several scenarios and weights them by probability. The weighted exit value then feeds the VC Method above.
| Scenario | Probability | Exit value | Weighted |
|---|---|---|---|
| Success | 25% | $300M | $75M |
| Base case | 50% | $80M | $40M |
| Failure | 25% | $0 | $0 |
| Probability-weighted exit value | $115M | ||
Using the same 60% retention and 10x target as above, post-money today = ($115M × 0.60) ÷ 10 = $6.9 million. The failure scenario is what keeps this method more conservative than a single optimistic exit case.
6. Comparables
The most common real-world approach. Build a set of similar companies (same stage, sector, geography, and time period), then look at what they raised at or what multiples they traded at. Adjust for differences in growth, team, and traction.
- Stage match: compare seed to seed, not seed to Series A.
- Time match: prices move with the market, so old rounds can mislead.
- Data quality: reported valuations often exclude structure such as liquidation preferences, which changes what the headline number really means.
Once a company has recurring revenue, comparables usually turn into revenue and ARR multiples. See Revenue & ARR Multiples.
Other approaches you will hear about
- Cost-to-duplicate: what it would cost to rebuild the company's technology and assets. It sets a floor but ignores future potential.
- Discounted cash flow (DCF): standard for mature businesses, but unreliable for startups because the forecasts and discount rates are guesses.
Which method fits which stage
| Stage | Most useful methods |
|---|---|
| Pre-seed | Berkus, Scorecard, Risk Factor Summation, comparables |
| Seed | Scorecard, VC Method, comparables |
| Series A | ARR multiples, VC Method, First Chicago |
| Series B and later | Revenue and ARR multiples, public comparables, growth-adjusted multiples |
Common mistakes
- Treating one method's output as a fact instead of a range.
- Using a hockey-stick exit assumption in the VC Method to justify a higher price.
- Comparing against headline round sizes from a different market cycle.
- Ignoring dilution from future rounds and the option pool when working backward from an exit.
- Confusing pre-money and post-money. See Pre-Money vs. Post-Money Valuation.
Related in the Startup Funding Library
← Startup Funding Library Startup Valuation Pre-Money vs. Post-Money Revenue & ARR Multiples Valuation Caps VC Fund Economics Dilution Explained Startup Funding WatchMethod descriptions draw on the original practitioner frameworks: Dave Berkus (Berkus Method), Bill Payne and the angel investing community (Scorecard), Ohio TechAngels (Risk Factor Summation), William Sahlman and Harvard Business School venture capital teaching materials (VC Method), and the First Chicago venture group (First Chicago Method). All figures on this page are hypothetical examples for illustration, not market data.
Evergreen Policy: Quarterly review. This is education, not investment or legal advice.
Author: Erwin Castro
No comments: