\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 For those of us who\u2019ve invested in early stage companies, especially technology start-ups, we have confronted a universal problem.\u00a0 There are many ways to project the value of a company for purposes of pricing an investment, but all rely upon the revenue and profit projections of the entrepreneur as a starting point.\u00a0 Many formulas then discount those projections according to some set percentage or by assigning weight to elements of the enterprise.<\/p>\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0And in my opinion, all fail to take into account the universal truth \u2013 that fewer than one in a thousand start-ups meet or exceed their projected revenues in the periods planned.<\/p>\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Years ago, confronted with the same conundrum, in the middle 1990\u2019s I came up with a method of assessing the value of critical elements of a start-up without having to analyze the projected financials, except to the extent that the investor believes in the potential of a company to reach over $20 million in revenues by the fifth year of business.<\/p>\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 First published widely in the book, \u201cWinning Angels\u201d<\/em> by Harvard\u2019s Amis and Stevenson with my permission in 2001, the method has undergone a number of refinements over the years, particularly in the maximum assigned to each element of enterprise value, reducing those amounts as the investment market adjusted from the craziness of the bubble to more logical values in the years that followed.\u00a0 Because the Internet has such a long memory and documents from the distant past can be found with ease, a search the \u201cThe Berkus Method\u201d today will yield a number of conflicting valuations culled from the many subsequent publications of the method over the ensuing years.<\/p>\n [Email readers continue here…]<\/em>\u00a0 <\/span>Here is the latest fine-tuning of the method. You should be able to adopt it to most any kind of business enterprise if your aim is to establish an early, most often pre-revenue valuation to a start-up that has potential of reaching over $20 million in revenues within five years:<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Note that these numbers are maximums that can be \u201cearned\u201d to form a valuation, allowing for a pre-revenue valuation of up to $2 million (or a post rollout value of up to $2.5 million), but certainly also allowing the investor to put much lower values into each test, resulting in valuations well below that amount.<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 There is no question that start-up valuations must be kept at a low enough amount to allow for the extreme risk taken by the investor and to provide some opportunity for the investment to achieve a ten times increase in value over its life.<\/p>\n \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Once a company is in revenues for any period of time, this method is no longer applicable, as most everyone will use actual revenues to project value over time.<\/p>\n","protected":false},"excerpt":{"rendered":" \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 For those of us who\u2019ve invested in early stage companies, especially technology start-ups, we have confronted a universal problem.\u00a0 There are many ways to project the value of a company for purposes of pricing an investment, but all rely … Continue reading \n\n
\n If Exists:<\/td>\n Add to Company Value up to:<\/td>\n<\/tr>\n \n Sound Idea (basic value)<\/em><\/td>\n $1\/2 million<\/td>\n<\/tr>\n \n Prototype (reducing \u00a0technology risk)<\/em><\/td>\n $1\/2 million<\/td>\n<\/tr>\n \n Quality Management Team (reducing execution risk)<\/em><\/td>\n $1\/2 million<\/td>\n<\/tr>\n \n Strategic relationships (reducing market risk)<\/em><\/td>\n $1\/2 million<\/td>\n<\/tr>\n \n Product Rollout or Sales (reducing production risk)<\/em><\/td>\n $1\/2 million<\/td>\n<\/tr>\n \n \u00a0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n