How to Determine Startup and Business Valuations – Best Way with David Berkus Model For Pre-Revenue Startup.
Every business has got a net worth which was valued by someone. Different businesses have used different methods to evaluate their businesses either for investors funding, Market cap determination or focal reasons.
Are you a startup founder wanting to Evaluate the worth of your business?
Are you a business owner wanting to know how much your business is worth?
Are you seeking funding from investors and want to know how many equity stakes you’re willing to give your investors for a certain amount?
This article is definitely for you.
I was in a board meeting with my team at Maxibu, where we were drafting out our business model and plan, it was a wonderful session and it came to us that we needed to evaluate our Nigerian startup in case we decide to go into funding.
Here is how to value a startup company in Nigeria just as we did on Maxibu.
Meanwhile, before the meeting, I had already discussed with a good friend of mine about the idea and he was thrilled at it and asked me to come back to him once we’re done with development so he can invest into the company.
Being a novice about getting investors into my startup, I asked him;
ME “How do you want to give us and what do you want from us?”
HIM: “I would love to spare 5 million naira for you guys depending on your startup value and worth”
ME: “but Maxibu is just an idea, must we have a value as a company to get funded?”
HIM: “Yeah, it’s left for your team to fix that and I would love to invest into your idea early enough”
Boom!, immediately it occurred to me that a lot have to be done.
So, I started asking questions and making research on how to value a new company and giving it a net worth before approaching investors.
Related: How to avoid fraudulent Investors
Well, for the kind of niche that Maxibu covers, it’s financially demanding and not what few tens of thousands of dollars can solve.
This was the brief story I shared in the meeting with my team before one of them made mention of Using the David Berkus Model to evaluate our startup.
After a few research about how to value a startup company with no revenue, I go to know that
The Berkus Method is a simple and convenient rule of thumb to estimate the value of your box. It was designed by Dave Berkus, a renowned author and business angel investor.
The David Berkus Method of company evaluation is one of the best startup evaluation templates for novice like me that had little knowledge of how the whole startup evaluation thing works.
First, Berkus says that investors should believe the company has a potential to hit $20 million or more in revenues by the 5th year of operation. Then, he applies a scale to five components of a startup, rating each at up to $500,000.
David Berkus Valuation Table
|If Exists:||Add to Company Value up to:|
|Sound Idea (basic value)||$1/2 million|
|Prototype (reducing technology risk)||$1/2 million|
|Quality Management Team (reducing execution risk)||$1/2 million|
|Strategic relationships (reducing market risk)||$1/2 million|
|Product Rollout or Sales (reducing production risk)||$1/2 million|
The David Berkus method table above is self-explanatory. It means that
- A great idea is worth $500k,
- A great management team is worth another $500k and
- A Minimal Viable Product (MVP) is worth another $500k.
Hmmm, that gives Maxibu a developmental valuation of a company worth $1.5MM
Once a company is in revenues for any period of time, this method is no longer applicable, as most everyone will use actual revenues to project value over time.
So, we used the David Berkus method to place a value on Maxibu project while development was going on.
Another good but complicated formula that I like as much as the Berkus model of Startup Valuation is the Venture Capitalist model developed by Professor Bill Sahlman at Harvard Business School in 1987. The Formula Essentially estimates the exit amount divided by the investor’s hopeful return on investment, let’s say 20X for a hi-tech company. Take that number and subtract the amount the company is seeking, now multiply by 70% to account for dilution and you have the valuation of the business pre-revenue.
At the end of the day, everything boils down to three basic assumptions when seeking venture capital into a startup. You need three major things;
- A great idea to start with,
- A good and dedicated management and
- Money for run your startup
If you have two of the three you can find the third.
Investors like going where there won’t run into loses, so, be unique and make sure your startup ideas is one that can scale.
So, at the end of the day, we were able to fix the question of “how to value a startup company with no revenue?”
You can as well use it to know the Value of Your Pre-Revenue Startup.