Worthworm Wisdom

Insights for entrepreneurs & investors

Valuation Methods: Spotlight on the Berkus Method

Posted by admin on 2013-11-14 04:07:50

Worthworm uses a blend of questions from some of the most popular valuation methods, including the Berkus Method. It’s one of the most well-known and widely respected methodologies (especially for technology startups) and uses both qualitative and quantitative factors to calculate a pre-money valuation. Learn more about it in our Valuation Methods Spotlight on the Berkus Method.

Choosing a valuation method is one of the many confusing challenges with valuing early stage companies. There are several popular methods, each with their own approach on how to best determine how much a venture is worth.

The Berkus Method is one of the most well-known and widely respected methodologies (especially for technology startups) and uses both qualitative and quantitative factors to calculate a valuation. It was developed in the mid 1990’s by Dave Berkus, an angel investor, speaker, author, and educator. He was frustrated by the fact that most valuation methods relied on an entrepreneur’s revenue and profit projections as a starting point, which were then discounted according to a set percentage or weight. As an alternative, Berkus developed a methodology that calculates a valuation based on five drivers. Here’s how it works:

CharacteristicAdd to Pre-Money Valuation
1. Sound Idea (basic value, product risk)$0-$500,000
2. Prototype (reducing technology risk)$0-$500,000
3. Quality Management Team (reducing execution risk)$0-$500,000
4. Strategic relationships (reducing market risk and competitive risk)$0-$500,000
5. Product Rollout or Sales (reducing financial or production risk)$0-$500,000

Berkus originally developed this methodology during the dot-com boom and assigned higher values ($1 million to $2 million) to each driver. In 2008, he modified it by reducing each value driver to a maximum of $500,000 in order to reflect current market conditions and include
barriers to entry and strategic relationships.

This method takes into account several key valuation drivers. However, other methodologies, like the Venture Capital Method and Scorecard Method, consider different factors or weights, which makes it hard to determine which approach(es) to use. Entrepreneurs aren’t appraisers, and they aren’t likely to be knowledgeable on the various valuation methods. Plus, angel investors often challenge the methodology chosen, leaving entrepreneurs awkwardly and uncomfortably speechless.

That’s where Worthworm comes in. Our tool helps reduce this contention and uncertainty by using a blend of questions from some of the most popular valuation methods, including the Berkus Method, the Venture Capital Method, and the Scorecard Method. The answers to these questions are put through a sophisticated analytic engine that produces a more well-rounded and credible pre-money valuation, reduces the debate over which approach was used, and brings entrepreneurs and angel investors closer together from the outset.

Curious which questions we incorporated from the Berkus Method? Or about how much your venture could be worth? Or looking for a world-class teaching tool? Or are you trying to do due diligence on potential deals?  Then try a subscription to Worthworm, and let us help you.