9 methods of startup valuation explained

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A startup is like a box. A very special box.

The box has a value. Its value increases as you put more things in the box. Add a patent and the value increases. Add a kick-ass management team, the value increases. Easy, right?

The box is also magical. When you put US$1 inside, it will return you US$2, US$3, or even US$10. Amazing!

The problem is that building a box can be very expensive. So, you need to go and see people with money (let’s call them investors) and offer them a deal that sounds a bit like this: “Give me US$1 million to build a box, and you’ll get X percent of everything that comes out of it.”

But how much should X be?

It depends on the pre-money valuation, i.e. the value of the box at the moment of the investment. But calculating the it is tricky. This article will take you through nine different valuation methods to help you better understand how to determine pre-money valuation.

1. Berkus Method

2. Risk Factor Summation Method

3. Scorecard Valuation Method

4. Comparable Transactions Method

5. Book Value Method

6. Liquidation Value Method

7. Discounted Cash Flow Method

8. First Chicago Method

9. Venture Capital Method

And the best valuation method is…