2022 A Comprehensive Guide to Scorecard Valuation Method with Example
Updated: Nov 8, 2022
Startups are the new black in Silicon Valley. If you don’t believe us, just look at the number of startups funded each year.
In 2018, $179.6 billion was invested in startups. This is close to a 50% increase from 2017 when only $116 billion was invested in startups globally.
Despite this huge investment, we still don’t have a great way of valuing these young companies with no profits or assets to speak of. So how exactly are these numbers created?
Valuation works primarily on two factors: future revenues and future customer base size.
The valuation of a startup is an important step in the process of preparing to raise capital. A valuation provides information that can be used by investors to determine whether they are comfortable investing in the company, and it also serves as the basis for determining how much money the company plans to raise. Let’s discuss the Scorecard Valuation Method. This method is based on the quality of the management team, market size, and the industry sector.
Table of Contents
What is the Scorecard Valuation Method?
Scorecard valuations assume that market conditions are consistent across industries. This method is used for early-stage, pre-seed, seed startups with no revenues yet. With this method, you look at benchmarks for similar early-stage, pre-seed, or seed startups with no revenues yet and average out their pre-money valuations. By comparing your business’s pre-money valuation against the average, you can get a sense of how angel investors value your business. Keep in mind that while this method allows angel investors to compare apples to apples, it doesn’t account for the nuances of any one business. That means the average valuation could be artificially high or low, resulting in a misleading valuation for your business. Keep in mind that this is a softer valuation—it doesn’t consider future growth or the potential of your business.
How does Scorecard Valuation Work?
The first step to performing a scorecard valuation is to find the average pre-revenue pre-money valuation in the region and business sector of the target startup company. You can use a pre-money valuation calculator to find the average pre-money valuation for pre-revenue startups. The main factors considered for the scorecard valuation method are as follows:
The strength of the Management Team (0–30%)
Size of the Opportunity (0–25%)
Product/Technology (0–15%)
Competitive Environment (0–10%)
Marketing/Sales Channels/Partnerships (0–10%)
Need for Additional Investment (0–5%)
Other (great early customer feedback) (0–5%)
According to angel investors, these percentages can be adjusted.
Steps To Calculate the Scorecard Valuation with Example
Step 1: Find the Average Pre-Revenue Pre-Money Valuation
This exercise aims to determine the most common value for a company when it isn't yet profitable. It helps investors understand what kind of valuation a company is likely to get as it starts generating revenues and if it will be able to raise money at an acceptable price.
It's a useful metric for determining what kind of return on investment (ROI) startups have been able to generate when they've gone through their financing rounds.
The average pre-revenue pre-money valuation is calculated by taking the total amount of money raised by companies in an industry, subtracting their pre-money value (the amount invested at the start), and then dividing that by the number of companies in the industry.
We are going to use four companies as examples. And all four companies are in the same industry.
Company A has a pre-revenue pre-money valuation of $1,000,000. Company B has a pre-revenue pre-money valuation of $2,500,000. Company C has a pre-revenue pre-money valuation of $3,500,000 and Company D has a pre-revenue pre-money valuation of $5,000,000.
Total Revenue/Number of Companies = Average Pre-Revenue Pre-Money Valuation
= 1,000,000 + 2,500,000 + 3,500,000 + 5,000,000/4
= $3,000,000
Step 2: Assigning Comparison Factors to the Percentage Weights
Let’s take an example of a startup company with strong management team experience and good teamwork. We will assign it 120% compared to others. The product has a good quantifiable target market so we will assign it 100% compared to others. The startup has developed an innovative product with distinct and useful features. We will assign it 140%. There are already established big players in the market and the startup is likely to face tough competition, so let’s assign it 90%. The startup lacks a sales and marketing strategy so let’s assign it 60%. There might be a need for additional fundraising in the future from VCs. We will assign it 100%. The product does not have great customer early feedback yet so let’s assign it 80% compared to others.
Calculate the Factor column by multiplying the Weight and Comparison columns.
Step 3: Multiplying the Sum of Factors
In the last step, we multiply the sum of all factors which gives us a total of 1.06 with the average pre-revenue pre-money valuation of the startups.
= $3,000,000 x 1.06
= $3,180,000
Our pre-revenue pre-money valuation for our target startup company is $3,180,000.
Advantages of Scorecard Valuation Method
It is easy to use, it does not require any expertise, and it can be used by anyone.
It is quick and requires less time.
It is helpful to value startups that have no revenue yet.
It helps in identifying the strengths and weaknesses of companies and organizations.
It helps in identifying the areas where improvements can be made to improve performance levels.
Disadvantages of the Scorecard Valuation Method
It is not an accurate method and does not provide full financial information.
It is not suitable for all businesses.
It is very difficult to obtain the appropriate data for a scorecard from an enterprise.
Conclusion
A better way to evaluate your business investment is by calculating the scorecard valuation method. The scorecard valuation method is an alternative model for evaluating a company's worth that can provide a more accurate estimation of your company's value, as compared to the more traditional replacement cost valuation method. While both methods have their merits, using the scorecard valuation method is a better way to evaluate a company's worth because it considers company metrics, such as team, product/technology, sales and marketing, and external factors like competition.