The Scorecard Method of Valuation (also known as the Bill Payne's Method) is a way of estimating the value of a early-stage startup (usually pre-seed and seed stage) that is seeking investment from angel investors. The method works by comparing the startup with other similar startups that have recently received funding in the same region and industry. It uses a weighted average of the pre-money valuations of these comparable startups as a benchmark, and then adjusts it based on various factors that affect the startup’s performance, such as the quality of the team, the size of the market, the stage of development, the competitive advantage, and the risk level.
Formula:
Valuation of Startup = [Base Valuation] X [Sum of Factors]
How to calculate the value of a Startup using Scorecard Method
For ease, let’s name your startup which is being valued as the [Alpha Startup]. We will be using the example of another startup to explain the process, which will be called [Startup Beta].
Step 1 (sector): Identify the sectors that the [Alpha Startup] operates in, which could be more than one. For example, [Startup Beta] was involved in various sectors such as Community Management Software, Smart Governance Platform and IoT (Internet of Things).
Step 2 (similar companies): Identify the companies that are similar to the [Alpha Startup] in terms of the sector/field it operates in. Preference should be given to the companies that are based in the same country as the [Alpha Startup]. Only those companies should be selected which have raised funding and preferably more than 1 round of funding. For example, in the case of the [Startup Beta], we found 11 such companies, 5 in Community Management Software, 3 in Smart Governance Platform, and 3 in IoT, which had raised Pre-Seed, Seed and in some cases growth stage funding as well.
Step 3 (base valuation): Tabulate the pre-money valuation of all similar companies identified in the last step, at which they raised their pre-revenue stage funding. This valuation should be found out from reliable sources (we use premium tools for this activity).
Pre-money valuation means the valuation of the startup before adding up the funding amount for that round. So, if valuation of the company is $1.1 Million after raising $100K, it means that its pre-money valuation is $1 Million ($1.1 Million - $100K).
Pre-revenue valuation is the valuation of a startup in the stage when it has no revenue or insignificant revenue (in case of [Startup Beta], revenue of less than ₹0.5 Crore was considered insignificant).
The median of these valuations is then worked out. This median valuation is considered as the [Base Valuation] for the purpose of Scorecard Valuation. An illustration of this exercise in case of [Startup Beta] is shown hereunder:
Particulars | Sector | Valuation in pre-revenue stage ($M) |
Adda | Community Management Software | 1.01 |
Zipgrid | Community Management Software | 1.55 |
Neighbium | Community Management Software | 1.95 |
ApnaComplex | Community Management Software | 0.63 |
MyGate | Community Management Software | 1.44 |
Mapunity | Smart Governance Platform | 2.2 |
Responscity | Smart Governance Platform | 0.28 |
iRam Technology | Smart Governance Platform | 0.04 |
eGlu | IoT | 2.01 |
Nebeskie | IoT | 0.37 |
Redcherry | IoT | 0.72 |
Median pre-money valuation of comparative startups (base valuation): | 1.01 |
Step 4 (profiling): Gain a deeper understanding of the similar companies on 6 broad parameters, by looking at their websites, LinkedIn profile of their founders and management team, and also their financials. Make a list of Founders’ profile from LinkedIn up to the date of incorporation of the companies, keeping note of their qualifications, number of years of experience, and key companies worked for, which are relevant to their expertise required for running the startup. An illustration of this is given hereunder:
Similar Company | Founder Profile (Source: LinkedIn) |
| |
|
Step 5 (weightage): Give weightage to each of the 6 parameters based on the importance of each parameter for the success of the startup considering the sector that the startup is in. More often than not, for early-stage startups, strength of the management team is one of the most important success factors, irrespective of the sector of the startup. For example, in case of [Startup Beta], it being a technology led startup, highest weightage was given to the management team and thereafter to the strength of the technology/product. An illustration of this is given in the next point.
Step 6 (scoring): Allocate scores to the [Alpha Startup] comparing it with the identified similar companies independently on each of the 6 parameters (refer note at the end of this article to know more about how to score). These scores are to be given in % form, thereby indicating whether it is better than the similar companies or worse.
>100% indicates better
<100% indicates worse
100% indicates same
One should keep in mind that scoring against parameter is independent of the other and therefore should not be influenced by another parameter’s score.
For example, in the case of [Startup Beta], we arrived at a conclusion that their management team were not as experienced as the management teams of the similar companies, and hence we gave it a score of 70%. Similarly, when it came to market size, we arrived at a conclusion that [Startup Beta]’s market was much wider than the similar companies, and therefore gave it a score of 130%. An illustration of this exercise is given hereunder:
Parameter | Weight (W) (in %) | Comparison (C) (in %) | Factor (W*C) |
Strength of the entrepreneur and management team | 30% | 70% | 0.21 |
Size of the Opportunity | 20% | 130% | 0.26 |
Strength of the Product and Intellectual Property | 20% | 100% | 0.2 |
Competitive Environment | 10% | 70% | 0.07 |
Marketing/Sales Channel/Partnership | 10% | 60% | 0.06 |
Need for Additional Investment | 5% | 100% | 0.05 |
Other (Location) | 5% | 100% | 0.05 |
Sum of Factors: | 0.90 |
Step 7 (factoring): The weights given to each parameter (refer 2nd column of the above illustration) is now multiplied with the score given to each parameter (refer 3rd column of the above illustration) to arrive at the Factor for each parameter (refer 4th column of the above illustration). These factors are then added up to arrive at the [Sum of Factors].
Step 8 (valuation): The [Base Valuation] computed in Step 3 is multiplied by the [Sum of Factors] computed in Step 7, to arrive at the final pre-money valuation of the [Alpha Startup]. For example, in case of [Startup Beta], the final pre-money valuation was:
$1.01 Million X 0.90 = $0.91 Million
Note: The questions tabulated by this research paper on early-stage startup valuation, may be asked at the time of scoring the [Alpha Startup] in comparison with the similar companies in Step 6 above.
How can Chunder Khator help startups in conducting valuations?
We help startups carry out an in-depth valuation of their venture, at the time of fundraising, or at the time of issue of ESOPs, or for statutory compliance. We usually use a combination of valuation methodologies like Discounted Cash Flow method, Venture Capital method, Comparative Company Analysis method, First Chicago method, Scorecard method, etc.
For fundraising, it is more important to have a range of valuation to work with rather than have a single value, as fundraising is a negotiation process in which multiple factors are considered. We usually recommend using 2-3 methods to arrive at a range of valuation and stake dilution that the founders can refer to at the time of deal negotiation.
We use premium databases and proprietary process to carry the valuation exercise that is readily accepted by founders and investors.
We also issue valuation certificates which is required under various statutes viz. Income Tax Act, Companies Act and FEMA.
We have carried out business valuation of several startups in the past. We have also assisted several investors (angels and VCs) to validate the valuation of startups at the time of deal evaluation.
To carry out valuation of your startup, reach out to us here.
What are the other areas where Chunder Khator can help startups and startup investors?
We help startups to build dynamic financial models (business projections) for planning and fundraising, draft/vet SHA and Term Sheet, provide advice in relation to equity/debt fundraise, prepare MIS for investors, provide shared CFO services, provide tax advisory, and more.
We help startup investors to carry out in-depth market/finance/legal due diligence of startups, draft/vet SHA and Term Sheet, and also monitor investments post deal.
Know more about our startup services here.
Comments