Score Cards Method
Score Cards method is a qualitative method often used to value early stage startups. In fact, without considering the predicted revenue and costs of the researcher or startup, this method determines the startup value relatively and comparatively by looking at the average value of similar startups in the early stages.
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Three steps in startup valuation with Discounted Cash Flows
You have been asked 14 questions, and as a valuator who is well-acquainted with the team, market and product, you are required to answer them.
Based on the information you have about similar businesses which are operating at the same maturity and market level, insert a value in the questionnaire.
Click on the “Calculate” button and after observing the estimated value of your business, check the graphs provided by Retiba.
Startup valuation using Score Cards Method
In startup valuation using Score Cards Method, the pre-money value of a startup will be calculated. Thus, having the average pre-money value of startups similar to the startup under valuation and also the score that the startup gains by answering the questionnaire, the pre-money value of the startup is easily calculated. Although gaining scores for the startup under valuation is a simple task and only takes a few minutes to answer the questionnaire, determining the average pre-money value of similar startups in the market in which the startup operates is a very difficult task and requires the availability of leaked data from a relatively mature startup ecosystems.
As mentioned above, gaining scores for the startup under valuation is a simple task and only takes a few minutes to answer the questionnaire. Startup scoring is done in seven different categories:
|Subject under investigation
|Management team capabilities
|The experience of startup founders in the past, whether they have a history of working as a CEO or not, their capabilities in the field of sales or in the field of technology and product development, etc. can increase the score for the management team.
|Target market size
|One of the most important factors that motivates a venture capitalist to invest in a startup is the size of its target market in which the startup wants to gain a share. So, the larger the market, the less negative effect the emergence of potential competitors on this startup in the future; somehow, the likelihood of business failure will be reduced.
|Product and technology
|The large business market alone has not been effective in the success of a startup, and high-tech products that can outperform its traditional competitors and gain a fair market share is another factor that can increase the startup attractiveness for investors. The more exclusive this technology is to that startup, the greater the investor’s confidence, and the less likely it is that in the future, other startups will enter with more investment and offer this product with a better quality.
|Gaining a share of an attractive market with the help of a high-tech, exclusive product is easy when the number of strong startup competitors in that market is limited. As the number of these competitors increases, the marketing and customer acquisition costs for that business will naturally increase and the investor will have to spend more capital on advertising campaigns to outperform the competitors to get the desired market share.
|Sales, marketing and competitors
|Choosing the optimized sales channels is another factor that can increase investor confidence in the future of the startup. This suitability, depending on the presence or absence of competitors at present, the type of target market in which the startup operates, as well as the degree of assurance of the correct operation of these channels, can increase or decrease the startup score in this category of Score Card Method.
|The need to increase capital in the future
|Another thing that can encourage investors to invest in startups is the number of fundraising rounds the startup needs in the future. The high number of possible rounds of fundraising in the future will not only dilute the investor’s share in the future, but will also delay the investor’s exit and will actually increase the investment risk in some way. Therefore, the higher the probability of increasing the number of fundraising rounds of startup after this stage, the lower the startup score in this category.
|In addition to the aforementioned factors, there are other factors that can increase the attractiveness of a startup for a venture capitalist. The investor’s taste, the charisma of the founders, the feedback provided by startup customers, etc. can provide the investor with positive signals to enter the project.
Score Cards valuation method considers the significance of various factors to find the inherent value of the business, and it is a quick and simple method. However, it should be noted that Score Cards valuation method is quite qualitative and different people may give different scores to one single startup.
It should be noted that in the process of startup valuation, it is not sufficient to reach a definite number as a result of valuation, and you as a valuator should be able to calculate the effect of different parameters on the valuation result.