What do you need to know to make the best choice?
To secure investment, you need to show investors what your startup is worth, but if you don’t yet have revenue or profit, that’s harder to calculate than it sounds. Startup valuation differs substantially from how established companies are valued, it’s based on research and forecasts rather than established financial trends. This guide walks you through the most common valuation methods, why the classic approach doesn’t work for early-stage companies, and how to actually build a defensible valuation.
Why Classic Valuation Methods Don’t Work for Startups
Established companies typically use the Discounted Cash Flow (DCF) method, relying on a 3-year financial plan: a profit-and-loss statement, capital expenditure, and working capital requirements, projected forward with a discounting factor. Most startups simply don’t have this data yet.
Startups differ from established companies in a few key ways: a 3-to-6-year plan carries far more uncertainty, it’s difficult to identify the right discounting factor for startup-level risk, business models change quickly in ways classic DCF doesn’t capture, and most startups are cash-negative in their early years, meaning valuation depends heavily on Terminal Value rather than current profit. In fact, a pre-revenue startup’s DCF valuation is often negative, without that number reflecting the company’s real value at all.
The Most Common Startup Valuation Methods
Venture Capital Method
Calculates your company’s expected value after a set number of years from the investor’s perspective, then works backward to determine today’s investment. Read the full breakdown in The Venture Capital Valuation Method.
Berkus Method
The Berkus Method acts as a rule of thumb for pre-revenue companies based on the moves they’ve made to get their startup running. By assessing the quality and status of a startup’s idea, quality management team, and strategic relationships, among other values, the Berkus Method allows pre-revenue startups to assign value to their company according to basic value, reducing execution risk and market risk.
Scorecard Valuation
Compares your pre-money valuation against similar startups in your region and stage, adjusted by factors like team strength, competition, and market size. Full details in The Scorecard Valuation Method.
Risk Factor Summation Method
Starts from the average valuation of comparable companies, then adjusts up or down based on 12 risk factors (management, business stage, competition, and more). See The Risk Factor Summation Method for the complete list.
Cost-to-Duplicate Method
The Cost-to-Duplicate Method allows investors to calculate a low range of company value by focusing on how much money it would take to duplicate your startup business elsewhere. Unlike most startup valuation methods, the cost-to-duplicate method does not calculate your company’s future potential but rather focuses on the value of the ideas, technology, and products you have already developed.
Discounted Cash Flow Method
The Discounted Cash Flow Method depends on three key values to calculate how much investors should contribute to your startup: your expected rate of cash flow over a fixed amount of time, the value of this cash flow against the original value of investment, and a discount rate for investors to account for the high-risk venture of startup companies.
First Chicago Method
Combines best-, base-, and worst-case scenarios into one valuation, helping investors weigh both upside and risk. Full explanation in The First Chicago Method.
Valuation by Stage Method
The Valuation by Stage Method is a quick method for venture capital firms and angel investors to determine your startup’s risk factors and potential, primarily based on which stage of starting up you have achieved. If you are at the initial stage of estimating the value of your company, investors will invest less in your project than if you have reached the more mature stage of producing a final product or accruing a solid customer base.
Comparables Method
The Comparables Method relies on values for more established startups that are similar to your own. By calculating the acquisition values and other criteria such as concrete numbers related to customer base or online followers or active users of more established startups, you can create comparative values for your own company.
Book Value Method
The Book Value Method is most relevant for startups that have tangible values, which typically excludes most startups, whose values are based on expected growth. It measures the concrete values of a company’s assets, such as land, buildings, and physical products, to calculate a company’s existing net worth.
How to Build Your Valuation: 6 Steps
“Rather than aiming for one perfect number, treat valuation as a range built from several methods used in parallel:
- Define comparable transactions, industries, stages, and regions for your startup
- Gather data on comparables and base valuations
- Identify which methods fit your specific stage
- Apply 2-3 relevant methods in parallel
- Set and benchmark your assumptions
- Define your final valuation as a defensible range, not a single figure