The Risk Factor Summation method (RFS) is a rough pre-money valuation method for early-stage startups. The RFS method uses a base value of a comparable startup for the valuation of your company. This base value is then adjusted for 12 standard risk factors. This means you compare your startup to other startups and assess whether you have a higher or lower risk.
How does it work?
- You start with an average valuation for your company based on similar companies in your area and region. Plan quite a bit of time for this step. Finding the relevant data of a comparable company can take some time!
- Then, you compare the different risk factors for your own startup on a range from very low to very high.
- Lower risks increase the valuation of your company while higher risks decrease the valuation.
- To improve your valuation, you can try to work on your risks and develop plans on how to cover or reduce them.
Best practice recommendations
- The RFS method is used mostly for pre-revenue, pre-money startups.
- Many investors use more than one valuation method for establishing a valuation range for startups.
- Challenge this valuation with the Venture Capital method, and the Scorecard Method.