How do you value startups and spin-offs pre-revenue?

Startup valuation is a hot topic for any founder looking for his or her first investor. The biggest issue stems from the fact that an early-stage startup faces so many risks in the product, market, and team dimensions that financial projections are more a pure demonstration of ambition than financial science. To overcome this challenge, venture capitalists apply three valuation methods that are independent of a startup's financial projections and are presented below:

  1. Payne Scorecard Method

  2. Comparable Transaction Method

  3. Cost-to-Duplicate Method

The Payne Scorecard Method is a relative valuation approach that compares the target company to a set of startups similar in stage, geography and industry. Variations occur due to differences in qualitative factors.

The comparable transactions method is also a relative valuation approach and is the simplest method. It just takes the average valuation of a set of startups similar in stage, geography and industry.

The cost-to-duplicate method, on the other hand, calculates the theoretical value to rebuild the startup. The method takes into account the time and resources required. This approach is mainly used by strategic investors, mostly established companies, to take a make-or-buy decision.