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How to do Valuation of Startup using the Scorecard Method?

Updated: Apr 8

The Bill Payne’s Method of Valuation is a way of estimating the value of a pre-revenue startup that is seeking investment from angel investors. It is also known as the Scorecard Method. The method works by comparing the startup with other similar startups that have recently received funding in the same region and industry. It uses a weighted average of the pre-money valuations of these comparable startups as a benchmark, and then adjusts it based on various factors that affect the startup’s performance, such as the quality of the team, the size of the market, the stage of development, the competitive advantage, and the risk level.


Formula:

Valuation of Startup = [Base Valuation] X [Sum of Factors]

 

How to calculate the value of a Startup using Scorecard Method

For ease, we will be using the example of another startup to explain the process, which will be called [Startup Beta].

 

Step 1 (sector): Identify the sectors that the Startup operates in, which could be more than one. For example, [Startup Beta] was involved in various sectors such as Fully Integrated Healthcare Platform and Practice Management System.

 

Step 2 (similar companies): Identify the companies that are similar to the Startup in terms of the sector/field they operate in. Preference should be given to the companies that are based in the same country as the Startup. Only those companies should be selected which have raised funding and preferably more than 1 round of funding. For example, in the case of [Startup Beta], we found 11 such companies, 6 in Fully Integrated Healthcare Platform, 3 in Practice Management System, 1 in CRM for healthcare Providers, and 1 in Pharmacy Tech, which had raised Pre-Seed, Seed and in some cases growth stage funding as well.

 

Step 3 (base valuation): Tabulate the pre-money valuation of all similar companies identified in the last step, at which they raised their pre-revenue stage funding. This valuation should be found out from reliable sources (we use premium tools and platforms for this activity).

  • Pre-money valuation means the valuation of the startup before adding up the funding amount for that round. So if valuation of the company is $1.1 Million after raising $100K, it means that its pre-money valuation is $1 Million ($1.1 Million - $100K).

  • Pre-revenue valuation is the valuation of a startup in the stage when it has no revenue or insignificant revenue (in case of [Startup Beta], revenue of less than Rs. 1 Crores was considered insignificant).


The median of these valuations is then worked out. This median valuation is considered as the [Base Valuation] for the purpose of Scorecard Valuation. An illustration of this exercise in case of [Startup Beta] is shown hereunder:

Particulars

Sector

Pre-money Valuation (INR Crores)

Drucare

Fully Integrated Healthcare Platform

47.87

NuvertOS

Fully Integrated Healthcare Platform

33.80

Mars Plus

Fully Integrated Healthcare Platform

24.70

Zealthix

Fully Integrated Healthcare Platform

23.00

TiaTech

Fully Integrated Healthcare Platform

16.90

Mocero Health

Fully Integrated Healthcare Platform

13.50

HealthPlix

Practice Management System

41.50

EHNOTE

Practice Management System

20.00

MocDoc

Practice Management System

16.55

BestDoc

CRM for healthcare Providers

16.30

Pharmarack

Pharmacy Tech

7.90


Median pre-money valuation of comparative startups (base valuation):

20.00

Step 4 (profiling): Gain a deeper understanding of the similar companies on 6 broad parameters, by looking at their websites, LinkedIn profile of their founders and management team, and also their financials. Make a list of Founders’ profile from LinkedIn up to the date of incorporation of the companies, keeping note of their qualifications, number of years of experience, and key companies worked for which are relevant to their expertise required for running the startup. An illustration of this is given hereunder:

Similar Company 

Founder Profile (Source: LinkedIn)

NuvertOS

  1. Nitin Gupta: Bachelor’s in Electrical and Electronics Engineering from Dr. A.P.J. Abdul Kamal Technical University. 8 years of overall experience in Adobe, HCL Technologies etc before NuvertOS happened. Founded two companies "thedocweb.com" and "NuvertOS" and also Co-Founded "Zeros".

  2. Abhishek Kashyap: 6 years of experience in working with thedocweb, Excellanto Ventures and Zeros.

Zealthix

  1. Abhishek Kumar: MBA from Indian School of Business and B. Tech from IIT Roorkee. 15 years of total experience in HealthAssure, BeatO, Biocon, Dr. Reddy etc and 11 years of experience in SoftDive Technologies as Founder. Total 26 years of experience.

  2. Deepak Chauhan: MCA in Computer Science from Aligarh Muslim University and Bachelor of Science from D.S College Aligarh. 12 years of experience overall in CARS24, Minda iConnect, Ephesoft, SoftDive, HealthKart and Nagarro. Currently working as Senior Engineering Manager at Tekion Corp.

  3. Avinash Gupta: M. Tech from IIT Bombay and B.E from Maharana Pratap University of Agriculture and Technology Udaipur. 25 years of overall experience, Co-Founder 2 more companies ASAPPP and Bookmycab.com, also he has been an Angel investor in Startup India program.

Step 5 (weightage): Give weightage to each of the 6 parameters based on the importance of each parameter for the success of the startup considering the sector that the startup is in. More often than not, for early-stage startups, strength of the management team is one of the most important success factor, irrespective of the sector of the startup. For example, in case of [Startup Beta], it being a technology led startup in Health Tech, highest weightage was given to the management team and thereafter to the strength of the technology/product. An illustration of this is given in the next point.

 

Step 6 (scoring): Allocate scores to the Startup comparing it with the identified similar companies independently on each of the 6 parameters (refer note at the end of this article to know more about how to score). These scores are to be given in % form, thereby indicating whether it is better than the similar companies or worse.

  • >100% indicates better

  • <100% indicates worse

  • 100% indicates same

 

One should keep in mind that scoring against parameter is independent of the other and therefore should not be influenced by another parameter’s score.

For example, in the case of [Startup Beta], we arrived at a conclusion that their management team is very experienced and belongs to same field whereas the competitors companies’ management were techies, and hence we gave it a score of 130%. Similarly, when it came to market size, we arrived at a conclusion that [Startup Beta]’s market was less wide than the similar companies, and therefore gave it a score of 105%. Make sure you document the basis of arriving at these conclusions. An illustration of this exercise is given hereunder:

Parameter

Weight (W) (in %)

Comparison (C) (in %)

Factor (W*C)

Strength of the Entrepreneur and the Management Team

30%

130%

0.39

Size of the Opportunity

20%

105%

0.21

Strength of the Product and Intellectual Property

20%

100%

0.20

Competitive Environment

10%

70%

0.07

Marketing/Sales Channels/Partnership

10%

120%

0.12

Need for Additional Investment

5%

120%

0.06

Other (Location)

5%

100%

0.05



Sum of Factors:

1.10

Here's a graphical representation of the scoring of the startup being valued against the comparable companies on each of the parameters:



Step 7 (factoring): The weights given to each parameter (refer 2nd column of the above illustration) is now multiplied with the score given to each parameter (refer 3rd column of the above illustration) to arrive at the Factor for each parameter (refer 4th column of the above illustration). These factors are then added up to arrive at the [Sum of Factors].

 

Step 8 (valuation): The [Base Valuation] computed in Step 3 is multiplied by the [Sum of Factors] computed in Step 7, to arrive at the final pre-money valuation of the Startup. For example, in case of [Startup Beta], the final pre-money valuation was:

₹20 Crores X 1.10 = ₹22 Crores

Note: The questions tabulated by this research paper on early-stage startup valuation, may be asked at the time of scoring the [Alpha Startup] in comparison with the similar companies in Step 6 above.


 

How can Chunder Khator help startups in conducting valuations?

  • We help startups carry out an in-depth valuation of their venture, at the time of fundraising, or at the time of issue of ESOPs, or for statutory compliance. We usually use a combination of valuation methodologies like Discounted Cash Flow method, Venture Capital method, Comparative Company Analysis method, First Chicago method, Scorecard method, etc.

  • For fundraising, it is more important to have a range of valuation to work with rather than have a single value, as fundraising is a negotiation process in which multiple factors are considered. We usually recommend using 2-3 methods to arrive at a range of valuation and stake dilution that the founders can refer to at the time of deal negotiation.

  • We use premium databases and proprietary process to carry the valuation exercise that is readily accepted by founders and investors.

  • We also issue valuation certificates which is required under various statutes viz. Income Tax Act, Companies Act and FEMA, by a Registered Valuer, Merchant Banker or Chartered Accountant.

  • We have carried out business valuation of several startups in the past. We have also assisted several investors (angels and VCs) to validate the valuation of startups at the time of deal evaluation.


To carry out valuation of your startup, reach out to us here.


 

What are the other areas where Chunder Khator can help startups and startup investors?

We help startups to build dynamic financial models (business projections) for planning and fundraising, draft/vet SHA and Term Sheet, provide advice in relation to equity/debt fundraise, prepare MIS for investors, provide shared CFO services, provide tax advisory, and more.

We help startup investors to carry out in-depth market/finance/legal due diligence of startups, draft/vet SHA and Term Sheet, and also monitor investments post deal.


Know more about our startup services here.

 
 
 
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