Whether you’re raising capital, prepping for an acquisition, or issuing equity to stakeholders – the valuation and expectations shape the deal. It sets the tone for how much ownership you give up, how current and new stakeholders contributions are recognized, how investors view your business, and influences future fundraising. Yet most early-stage founders aren’t clear on how investors arrive at those numbers. To help with understanding, realize investors use various valuation methods based on the stage and type of the venture, product / market fit, traction in the market, product sophistication, the size and nature of the opportunity, etc. Being aware of this enables Founders frame the ask for funding better, make a strong case to justify the evaluation, avoid misunderstanding, negotiate with more confidence, get better terms, etc.
Valuation Methods
- The Berkus Method : Valuing Potential Over Revenue
- Comparable Transactions : The Startup “Comps” Approach
- Scorecard Valuation : Adjusting for Local Strengths
- Cost-to-Duplicate : Rebuilding from Scratch
- Risk Factor Summation : Quantifying Uncertainty
- Discounted Cash Flow (DCF) : The Financial Forecast Model
- Venture Capital Method : Exit-Driven Estimation
- Book Value Method : Net Worth of the Startup
1. The Berkus Method : Valuing Potential Over Revenue
This is good if the startup has no or little revenue. It was designed for early-stage founders who are organizing or initially building the business with a slide deck or maybe have a prototype – but no numbers to back up a financial model.
Here’s how it works : Investors break the startup into 5 categories — the idea itself and the opportunity, the strength of the team, the stage of product development, the product’s launch readiness, and any strategic relationships in place. Each category is assigned a dollar amount – up to $500K each. Add them together, and that’s your pre-money valuation.
This forces everyone to focus on what actually matters to move the venture forward and recognize what’s needed to mitigate risk. Recognize, the more de-risked each area, the higher the potential and valuation.
Also recognize it’s also subjective since what looks like a great team to the Founders might seem inexperienced or lacking to a seasoned investor. And realize once the venture starts generating revenue, there is a need to move to other valuation methods.
Founder tip : Don’t just check boxes. Show progress in each of the five areas. If you have early feedback on your prototype, mention it. If you have Advisor(s) with industry experiences and connections, that’s leverage.
2. Comparable Transactions : The Startup ” Comps ” Approach
This is a common method because the Comparable Transactions method looks at how similar startups have been valued in recent funding rounds or acquisitions. For example, if a similar startup raised $20M pre-money valuation, it sets a baseline for what the market is willing to pay.
The logic is simple – Find relevant deals, extract the valuation multiples (like revenue or user-based), and apply them to your venture. In this case, if SaaS startups at your stage are getting 8× ARR and you’re doing $2M ARR, your implied value could approximate $16M.
But here’s the catch: good comps are hard to find. Many deals are private. The details are often fuzzy. And what looks like a similar company on the surface might have different margins, markets, or teams.

Founder tip : Use comps as a credibility tool, not a crutch. If you’re anchoring to market data, be ready to explain why those startups are truly comparable, and what makes you more (or less) valuable. Since Investors can challenge the fit, be prepared.
3. Scorecard Valuation : Adjusting for Local Strengths
The Scorecard Method starts with one question : What’s the going rate for similar startups ? If most pre-seed rounds in the industry or city are getting $3 million pre-money, that becomes the baseline.
From there, Investors adjust up or down based on how the startup stacks up against others in key areas including – team quality, market size, product sophistication, traction, the competitive landscape, etc. Each factor has a weight.
For example, the team could count for 25 %, the market size for 20 %, and so on. If the team is stronger than average, that part gets a boost. If your go-to-market looks weak, that portion might get docked.
Common scorecard criteria and value are :
- Board, entrepreneur, the management team – 25 %
- Size of opportunity – 20 %
- Technology / Product – 18 %
- Marketing / Sales – 15 %
- Need for additional financing – 10 %
- Other – 10 %
Let’s say the weighted score comes out to 110 % of the local average. If the average valuation is $3M, the adjusted valuation becomes $3.3M.
This method is popular with Angels because it blends local market data with structured judgment. But it depends heavily on having accurate benchmarks and honest comparisons.
Founder tip : Have your data ready; know the average valuation in your area and stage. And when pitching, don’t just say you’re better, explain why. Highlight what makes your team, market, or product stand out to earn a premium.
4. Cost-to-Duplicate : Rebuilding from Scratch
This method asks a basic but important question : How much would it cost to build the startup from the ground up today?
The Cost-to-Duplicate approach estimates the value of the business by adding up everything it took (or would take) to recreate it. That includes engineering time, salaries, tech infrastructure, R&D, hardware, patents, and other tangible investments.
For example, if $1.2M was spent building a working prototype, hiring a dev team, and launching the first version – then the valuation would be in this vicinity.
Investors sometimes use this as a floor or as a minimum valuation based on the effort already invested. It’s particularly relevant for asset-heavy companies or those with deep tech, where replicating the product is expensive.
The limitation with this method is it doesn’t factor in the upside. If you’re solving a huge problem with high margins and a scalable model, those aren’t reflected in cost alone. As such, a team that built something valuable on a tight budget would probably deserve a much higher valuation than those related to costs alone.
Founder tip : Calculate the “ cost to build ” as a good fallback if Investors push back on price and highlight traction, market size, vision, etc. to get a better valuation.
5. Risk Factor Summation : Quantifying Uncertainty
This method takes a structured approach to something very important to an Investor – Assessing Risk. The Risk Factor Summation Method starts with a base valuation, often the average pre-money for comparable startups and adjusts it up or down based on – technology sophistication, business risk, the market / opportunity, competition, barriers to entry, legal or regulatory hurdles, funding needs, sales and marketing execution, strength of the management team, etc. Each risk is scored on a scale from very positive to very negative, and each score adds or subtracts a fixed amount (typically $250K) from the base valuation.
For example, if the average valuation in your sector is $3M. An Investor could score the startup +1 for a strong team (+$250K), +2 for clear exit potential (+$500K), but -1 for tech complexity (-$250K) and -2 for intense competition (-$500K). Net adjustment : -$0. The final valuation stays at $3M. For further insights see –

While the method is comprehensive and forces people to think through risk logically, it’s still subjective with scoring varies from person to person.
Founder tip : Ask the potential investor which risks matter most to them. If you can mitigate or reframe those concerns, you may be able to shift the math in your favor.
6. Discounted Cash Flow (DCF) : The Financial Forecast Model
DCF is a rigorous valuation methods built on a simple idea – a business is worth the money it will generate in the future, adjusted for the risk of actually getting there.
You start by projecting the venture’s future cash flows over the next 5 to 10 years, estimate what the company could be worth at the end of that period (the terminal value), and then discount everything back to today’s value using a designated rate of return (ROI). The higher the risk, the higher the discount rate, and the lower the present value.
This method is great for startups with steady revenue and visibility into growth, typically post-Series A or later. But in early-stage deals, DCF often falls apart since forecasts are guesses, and discount rates are aggressive. Recognize a small change in assumptions can swing the valuation dramatically.

Founder tip : DCF helps in understanding the long-term economics of the business model. But if you’re still figuring out pricing, CAC, etc., it’s a challenge since there isn’t a credible multi-year financial forecast. However, be able to advise investors you’ve thought ahead and are realistic in establishing a time frame to use this valuation model.
7. Venture Capital Method : Exit-Driven Estimation
The Venture Capital Method works backward from the endgame. It starts with a projected exit, through acquisition or IPO, and calculates how much needs to be invest today to hit the Investor target return.
This method is usually done in 6 steps:
- Estimate the Investment Needed
- Forecast Startup Financials
- Determine the Timing of Exit (IPO, M&A, etc.)
- Calculate Multiple at Exit (based on comps)
- Discount to PV at the Desired Rate of Return
- Determine Valuation and Desired Ownership Stake
Here’s the basic flow – estimate your exit valuation (say, $100M in 5 years), then apply the investor’s desired return, often 10x or more. If they want 10x, the venture needs to be worth $10M today. Subtract the size of the investment, and you get your pre-money valuation.
This method is fast and common in VC conversations because it ties valuation to actual returns. But it’s also rough by assuming a successful exit – and glosses over all the twists and turns in between.
If the Investor thinks the company could exit at $100M and wants a 10x return, they’ll only invest if they can get in at a $10M post-money. If you’re raising $2M, that puts your pre-money at $8M.
Founder tip : Know the math investors are doing behind the scenes. You can’t control their return targets, but you can influence the exit assumptions. Make a credible case for why your business could be a $100M+ outcome, and back it up with data and logic.
8. Book Value Method : Net Worth of the Startup
The Book Value Method is old-school in that it calculates the startup’s value by subtracting liabilities from assets, essentially, what the company is worth on paper if it shut down today.
It’s grounded in accounting, not projections. Cash, inventory, equipment, and any recorded IP count as assets. Loans, payables, and other debts are liabilities. The difference is your book value. For example, if there is $1.5M in assets and $500K in liabilities, the book value is $1M.
This method makes sense in very specific cases like asset-heavy businesses, liquidation scenarios, or internal transfers. But for high-growth or asset light startups, it rarely tells the full story. A lean SaaS company with big upside might have almost nothing on the books, just a few laptops and some code.
Founder tip : Don’t lead with book value unless the assets are a real part of the story. Make sure the books are clean with a strong balance sheet can still signal financial discipline, especially in late-stage or acquisition talks.
LL
Summary

Since there is no single right answer, the best startup valuation method depends on the quality and competencies of the founder team, product sophistication, the size of the market / opportunity, venture stage, industry, the probability of effecting change, potential revenue, risks, relevance of Investor Value Add, etc.
If you’re early and pre-revenue, utilize the Berkus, Scorecard, or Risk Factor Summation methods.
If you’ve launched and have traction, Comparable Transactions and Cost-to-Duplicate help with meeting expectations.
Once revenue kicks in, DCF or the VC Method becomes more relevant.
For asset-heavy or late-stage startups, Book Value is more applicable.
To have a valuation range, triangulate using 2 – 3 methods as indicated below –
Example 1 : A pre-seed SaaS startup with a prototype and no revenue might blend Berkus (to value progress), Scorecard (to align with local deal norms), and Risk Factor (to adjust for execution risk).
Example 2 : A Series A e-commerce startup doing $3M in revenue could use Comparable Transactions, a light DCF, and the VC Method to frame its next round.
In conclusion, use valuation methods as tools to enable all parties get on the same page about what the business is worth today and an appreciation of the potential.
And recognize, while the number matters, the story, the people, the potential, the ability to execute, prudently manage risk, and create significant value matter more.
June 25, 2025 CAIL Venture Investing commentary info@cail.com www.cail.com 905-940-9000