How do you use the scorecard method to value your startup?
If you are a startup founder looking for funding, you may wonder how venture capitalists (VCs) value your company. One of the methods they use is the scorecard method, which compares your startup to other similar companies in your industry and stage. In this article, you will learn how to use the scorecard method to estimate your startup's pre-money valuation, which is the value of your company before receiving any investment.
The scorecard method is a relative valuation technique that assigns a percentage weight to different factors that affect your startup's potential, such as the team, the market, the product, the traction, and the risk. The scorecard method then multiplies these weights by the average pre-money valuation of comparable startups in your sector and region, based on recent deals or industry benchmarks. The sum of these products is your estimated pre-money valuation.
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As someone who has done startup valuations, I use the Scorecard technique as an addition to Income based approach💼📊 . When I valued a SaaS startup in Bangalore, i analysed similar startups at the same stage to arrive at an average $10 Mn pre-money valuation💰🧐. I assigned the weights as follows: 📍Quality of management - 35% 📍Size of opportunity - 20% 📍Tech - 20% 📍Sales - 15% 📍Need for financing - 10% Comparing the startup with its peers, it had a 📍Large TAM📈🌍 (100%) 📍A firm founder👥🔝 (130% of peers) 📍Good product💼🔝 (100%) 📍Competition 🏆👥(80%) Need for financing 💸🏦(100%) Range = (100%*20%)+(35%*130%)+(100%*20%)+(80%*15%)+(10%*100%) = 107.5% The pre-money valuation = 107.5%*10 = 10.75 Mn💼💰
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The scorecard method is a popular qualitative method used by angel investors and early-stage venture capitalists to determine the valuation of a startup, especially in the pre-revenue or very early stages. It involves comparing the startup in question to other recently funded startups and adjusting the average valuation of those companies based on specific attributes of the startup being evaluated.
To use the scorecard method, you need to find comparable startups that have similar characteristics to yours, such as the industry, the stage, the location, and the business model. You can use sources like Crunchbase, PitchBook, AngelList, or industry reports to research recent deals and valuations in your space. You should aim to find at least 10 to 15 comparable startups that have raised funding in the last 12 to 18 months.
The next step is to assign weights to different factors that influence your startup's value. This should be based on how you compare to the average of your peers, with the typical weights being Team (30%), Market (25%), Product (15%), Traction (15%), and Risk (15%). However, you should adjust these weights according to your specific situation and industry, as long as they add up to 100%. It is essential to be realistic and honest about how you rank against your competitors on each factor, as opposed to overestimating or underestimating your strengths and weaknesses.
Once you have assigned weights to each factor, you can multiply them by the average pre-money valuation of your comparable startups. For instance, if the average pre-money valuation of your peers is $10 million, and you score 80% on team, 70% on market, 90% on product, 60% on traction, and 50% on risk, your estimated pre-money valuation would be $7.15 million. This total is calculated by multiplying each factor by its weight and the average pre-money valuation (i.e., Team: 0.3 x 0.8 x $10 million = $2.4 million; Market: 0.25 x 0.7 x $10 million = $1.75 million; Product: 0.15 x 0.9 x $10 million = $1.35 million; Traction: 0.15 x 0.6 x $10 million = $0.9 million; Risk: 0.15 x 0.5 x $10 million = $0.75 million). This means that your startup is worth this amount before receiving any investment, according to the scorecard method.
Your pre-money valuation is not a fixed or final number, but rather an estimate based on assumptions and comparisons. It can change over time as your startup evolves and as the market conditions and investor preferences change. Therefore, you should use your pre-money valuation as a starting point for your fundraising discussions, not as a rigid demand or expectation. You should also be prepared to justify and defend your valuation with data and evidence, and to negotiate with potential investors who may have different opinions or methods. Ultimately, your pre-money valuation is determined by what someone is willing to pay for your startup, not by what you think it is worth.
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A good way to get feedback is to ask the VC how much doe she think your valuation should be. This is a good test if you did your research before. Does the VC know this market? Does he treat you fairly? How does he explain the number? Of course, don't consider it a no deal because the number is lower than you though it would be. The process, reasoning and non monetary support is just as important for your future success. But this is one way to see if you can build a good working relationship to create value with the VC.
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This is not a useful exercise for a startup to do in its entirety, IMO. Yes, you should do some homework on valuations for comparable startups with similar characteristics to yours (as suggested). But I'd stop there. You are better off spending your time focusing on execution and getting in front of more/better-fit investors (awareness & demand generation)—perceived demand for your round will have 100x more impact on value than your own internal justification for value based on (any valuation) method.
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This exercise have to be done carefully and you should not get over attached to it. If this is your first (and sometime second) fund-raise, you will likely end with a cap and a discount. If you are slightly later, you will not fix the valuation of your startup. The VC that lead and bringing in the money you need do it (it is his job and requires very specific expertise). Your calculation can be a reference, but don't get too hung up on it. The best way to raise your valuation is to generate cash. The closer you are to cash flow positive, the easier the discussion. Polish your product-market fit, bring in more customers, make your team more efficient will pay more than over engineering your valuation.