STARTUP VALUATION
The Berkus Method
In this section, we delve into another widely recognized model for valuing pre-revenue startups: the Berkus Method, named after its creator, Dave Berkus, a prominent Californian angel investor. Though the Berkus Method originated in the 1990s, it has since been refined and adapted to suit contemporary market conditions.
It is one of the three simple valuation methods of DealMatrix, next to the Payne Scorecard & the Venionaire Method.
The Berkus Method is a simple tool for evaluating a pre-revenue startup that considers risk factors rather than relying on financial projections.
Denis Voldman
Lead Investment Analyst @ Venionaire Capital
- Last updated: August 19, 2024
- Reading Time: 4min
Table of Contents
Why choose the Berkus Method?
The Berkus valuation method assigns value to the business idea and four key success factors of the company, with each category capped at EUR 500,000. These critical value drivers highlight risk areas that could determine the company’s success or failure. Managing these risks effectively is essential for the company to succeed. As the company mitigates key risks, its value increases, linking risk reduction directly to valuation.
This method is best suited for early-stage, pre-revenue startups and is not ideal for valuing companies with recurring revenue streams.
Quantitative and qualitative factors
A major challenge with valuing early-stage companies is the absence of substantial revenue figures, and even if a product is available, it’s typically just a minimum viable product (MVP). Most valuation methods depend on revenue and profit projections, but few early-stage startups meet or exceed their initial financial forecasts. As a result, traditional quantitative valuation models may not produce accurate results.
The Berkus Method seeks to address the difficulty of quantifying unquantifiable aspects by employing a blend of qualitative and quantitative factors. It calculates valuation based on five key elements:
1) Valuable business model (Business Risk)
2) Available prototype (Development Risk)
3) Abilities of the founding or management team – (Execution Risk)
4) Strategic Relationships (Investment Risk)
5) Existing customers or first sales (Marketing Risk)
Valuation along the key parameters
In the initial step, each of the elements mentioned above must be assigned a monetary value, with a maximum value of EUR 500,000 per element. This allows for a maximum pre-revenue valuation of EUR 2 to 2.5 million. Berkus sets a “soft cap” of EUR 20 million valuation in the fifth year of business, offering investors the potential for a ten-fold return over the life of the investment.
By adjusting the parameters and modifying the maximum added values to your needs, you can observe changes in pre- and post-money valuations.
Generally, if everything goes well for the startup and investor, the company will achieve stable sales, and the Berkus Method can be replaced by more quantitative valuation methods in subsequent fundraising rounds.
Next up, The Payne Scorecard Method takes a slightly different approach to evaluate your startup.