Valuations 101: The Dave Berkus Method

Bill Payne , Angel Investor , Frontier Angel Fund

2 Nov 2011

We recently started a series of posts on establishing the pre-money valuation of pre-revenue startup companies for purposes of investment by seed and startup investors.

Dave Berkus is a founding member of the Tech Coast Angels in Southern California, a lecturer and educator.  He has invested in more than 70 startup ventures.   Dave’s valuation model first appeared in a book published by Harvard’s Howard Stevenson in the middle nineties.  It has been used by angels since, however Dave updated the model for 2009 ACA Leaders Workshop in Richardson, TX.  Here is his latest version.

Note that the numbers are the maximum for each class (not absolutes) so a valuation can be $800K (or less) as easily as $2.5 million. Furthermore, Dave reminds us that “it was created specifically for the earliest stage investments as a way to find a starting point without relying upon the founder’s financial forecasts.”

I have several comments on the Berkus Method:

• This is a very useful method and should be in an investor’s valuation toolbox.
• It is good to establish some triggers for fundable companies.  For example, some investors would not fund a company without at least a minimum of customer feedback or intellectual property.  It is always a good idea for angels to establish the minimum expectations for fundable companies.
• Some issues or characteristics may be missing from Dave’s methodology.
• Is the competitive environment important in the business sector of the target venture?  If so, perhaps consideration of such value should be considered.
• Is the depth of intellectual property and competitive differentiation important to the target venture?  If so, perhaps consideration of such value should be considered.
• Is the size of the opportunity to investors considering funding this target company?  If so, perhaps consideration of such value should be considered.

However, referring to #2 above, it is possible for investors to consider each of these three characteristics as minimum triggers for investment.  If present, then Dave’s valuation is sound.

Best practice for angels investing in pre-revenue ventures is to use multiple methods for establishing the pre-money valuation for seed/startup companies.  The Dave Berkus method is useful as one such method.   In recent posts, I have described the Scorecard Method and the Venture Capital Method as other important methodologies for determining the pre-money valuation of pre-revenue seed/startup ventures.  In future posts, I will describe additional methods.

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