Scorecard Method Startup Valuation
As mentioned in previous articles, the Scorecard is one of the most common methods for startup valuation. This system is entirely qualitative. In addition, the Scorecard method is mainly for startups that are in the early stages. Consequently, angel investors are most interested in using it to obtain the pre-money valuation.
The scorecard method is also known as its creator, Bill Payne. Investors give points to the startup based on the quality criteria that we will discuss precisely in the following. Finally, based on this score and the average value of startups in that industry, the final value is obtained.
In the general classification for startup valuation methods, the scorecard method is a qualitative and intuitive business valuation. In this system, valuation is based on the average value of similar startups (similar in terms of industry, development stage, geographical area, etc.) as well as the startup score.
Steps for Valuing the Startup Using Scorecard Method
we can break down the Scorecard Method into the following steps:
- Determining the average pre-money valuation of similar startups as a basis for comparison
- Determining comparison factors and weighting them based on their influence
- Scoring the startup on each of the factors and determining the final score
- Calculating the value of a startup
The details of each step are as follow:
Determining the pre-money valuation of similar startups as a basis for comparison
The first step in valuing a startup with the Scorecard method calculates the average value of similar startups. The pre-money value of startups before generating revenue varies in different economies and competitive environments. However, in most areas of industry, their value is close to each other. According to a 2011 study in the United States, the pre-money value of startups before generating revenue averaged $ 2.1 million.
To use the Scorecard method in a unique ecosystem, we need to get the average value of the startups in that ecosystem. However, some books and resources have calculated these average values for each development phase, before the acceleration phase and after it. We should note that these resources are specific to each ecosystem and are not generally applicable. They are also regularly updated based on new economic circumstances.
Determining Comparison Factors and Weighting Them Based on Their Influence
The next step in valuing a startup using the Scorecard method is to compare it with similar startups based on market perception. The main comparison factors presented by Bill Payne are as follows:
- Founder and management team capability 0-30%
- Opportunity size 0-25%
- Product and technology 0-15%
- Competitive environment 0-10%
- Strategic partnerships in marketing and sales 0-10%
- Need to raise capital 0-5%
- Other factors 0-5%
In the above division, the factors that have a higher weight will play a more significant role in determining the startup’s value. As you can see, more weight is assigned to the team’s capabilities. A good team can turn a bad idea into a good one and successfully implement it. In contrast, a good idea cannot be implemented without a good team.
Scoring the Startup on Each of the Factors and Determining the Final Score
In the previous section, we stated the main factors for comparing startups with similar business. But to use this method, you should score each of the elements. The professionals who work with multiple startups, and have more experience in evaluating them, can provide more accurate scores. Furthermore, Bill Payne has provided an additional file in which he has described all of the scorecard factors qualitatively, and the sub-factors of each are specified. Here is how to score each factor:
The capability of entrepreneurs and the management team
- Has several years of business experience +
- Having experience in a similar industry ++
- Experience as CEO +++
- Has work experience as a key manager (technical manager, business manager, …) ++
- Work experience as a product manager +
- Has work experience in sales or technical team _
- No work experience _ _
The tendency of people to resign in the case a more experienced manager joins:
- Are willing +++
- Neutral 0
- Are not willing _ _ _
Team manager flexibility and mentorship capability
- Yes +++
- No _ _ _
How complete is the startup management team?
- Only the founder _
- Another critical manager (e.g. technical manager) 0
- The team members have been identified, but their participation is not definite. +
- The team is complete. +++
B. Market and opportunity size:
What is the size of the annual market?
- Less than $….. . _ _
- About $….. . +
- More than $….. . ++
Startup growth potential in the next five years:
- Less than $….. . _ _
- About $….. . ++
- More than $….. . _
Tip: The numbers are different based on the economic conditions and the startup region, so we did not mention.
C. Product and intellectual property:
Has the product been developed?
- The product has not been made yet, and the team is looking to make a prototype. _ _ _
- The prototype is ready and has good quality. 0
- The product is ready and has received good feedback from customers. ++
- The order has been taken to produce the product. +++
Is the product attractive to the customer and encourages them to buy?
- Product is like vitamin pills and is not essential. _ _ _
- It can solve customer problems. ++
- The product is essential for the customer. +++
Can the product be copied and created by competitors?
- It can be easily copied and has no intellectual property. _ _ _
- It isn’t easy to copy the product. 0
- Product manufacturing is very complex and has some trade secrets. ++
- The product is registered.+++
D. competitive environment:
The strength of competitors in the market
- A bitter rival has conquered the market. _ _
- There are several severe competitors in the market. _
- The market is fledgling, and there are only a few small competitors. ++
Competitors Product quality:
- The competitors’ product is excellent. _ _
- The competitors’ product is fragile.+++
E. Marketing, sales and business partners:
Sales channels and business partners in marketing and sales:
- Sales channels have not yet been explored. _ _ _
- Initial sales methods have been tested. +++
- Sales channels are identified and tested on customers.+++
- The business partners have not been identified._ _
- Business partners already exist. ++
F. Need to raise capital again:
Does the startup need to raise capital again?
- It does not require capital. +++
- Need to attract less capital from angel investors. 0
- Needs to attract capital from venture capitalists._ _
However, as you can see, the scores range from “- – -” to “+++”, indicating each section’s score. Finally, the sum of the scores, obtained by multiplying the score of each factor by its weight, allows investors to decide about the startup value by comparing it to the average in industry.
Calculating the Value of a Startup
In the last step, using the following formula and the data obtained in the previous section, you can calculate the startup’s value.
Startup Value = Total Startup Scores * Average value of similar startups.
For example, suppose the average value of startups is equal to 10 million dollars. And the startup in question is 20% better than average based on the above factors (i.e. its score is equal to 1.2 or 120%). In this case, The value of the startup is about 12 million dollars.