Worthworm Wisdom

Insights for entrepreneurs & investors

Valuation Methods: Spotlight on the Scorecard Method

Posted by admin on 2013-10-10 03:46:28

Worthworm uses a blend of questions from some of the most popular valuation methods, including the Scorecard Method. This methodology calculates a valuation by comparing a business to other pre-revenue ventures in the same region and sector. Learn more about it in our Valuation Methods Spotlight on the Scorecard Method.

Choosing a valuation method is one of the many confusing challenges with funding negotiations. There are several popular methods, each with its own approach to determining how much a venture is worth.

The Scorecard Method, also called the Bill Payne Method or the Benchmark Method, was developed by angel investor Bill Payne as a way to value a pre-revenue venture by comparing it to other ventures in the same region and business sector.

Here’s how to calculate a PMV using the Scorecard Method:

1. Gather valuations for other pre-revenue companies in your sector within your geographic region. Then, calculate the average of those valuations. 

2. Compare your venture to similar deals done in your area using the following factors:

Value DriverWeight
Strength of the Management Team0-30%
Size of the Opportunity0-25%
Product/Technology0-15%
Competitive Environment0-10%
Marketing/Sales Channels/Partnerships0-10%
Need for Additional Investment0-5%
Other0-5%

If your company’s performance for one of these value drivers is about average, write down 100% as your score for that area. If it’s stronger than average, write down a number greater than 100%, such as 125% if you believe that your venture performs about 25% better or 150% if it is significantly better. If your company is weaker, give yourself a score that’s less than 100%.

Here is how a hypothetical worksheet might look for a company that has a better team, opportunity, and product than comparable ventures; a weaker position in the competitive environment; and average marketing, investment needs, and other factors.

Value DriverWeightYour Venture’s ScoreFactor
Strength of the Management Team30%150%0.4500
Size of the Opportunity25%125%0.3125
Product/Technology15%125%0.1875
Competitive Environment10%75%0.0750
Marketing/Sales Channels/Partnerships10%100%0.1000
Need for Additional Investment5%100%0.0500
Other5%100%0.0500

3. Multiply the sum of those factors by the average pre-money valuation that you identified in Step 1.

The result is a PMV that will likely be reasonable when compared to similar ventures around you. However, the downsides to this method are that the valuations are only as good as the comps you use, and the process of identifying your multiplier is extremely subjective.

The Scorecard Method can serve as a starting place for your PMV, but in order to develop a valuation that’s more sophisticated and credible, you need a more robust tool. That’s why we created Worthworm. Our tool’s questionnaire incorporates a blend of questions based on the Scorecard Method and several other widely respected methods. Then, the answers to those questions are put through an in-depth analytic engine that produces a more objective and sound pre-money valuation.

Whether you’ve already calculated your valuation using the Scorecard Method or you’re starting from scratch, try a free trial of Worthworm to see what your venture could be worth and find a stronger starting point for your conversations with investors.

Image courtesy of CarbonNYC