The real answer (that not many people are willing to say), is this: you go outside, raise your thump towards the sky, imagine a nice number, and that's the valuation. It's called the thumb valuation.
But seriously, there is no "official" accounting method to evaluate a startup that is not already selling, and even then the sales don't necessarily indicate the value of the company.
In any event, some of the below are good indicators of value:
1. Do they have a patent?
2. Have they already developed the technology? Is it working?
3. Do they have sales or traction?
4. How much is each sale/signup/download costing versus how much are they making (going to make) from each of these users?
5. How long has the team been together? If they're offering a technological solution, is the CTO a member of the team, or an external company?
6. Are there any similar companies providing similar services? If so, check how much money these companies have raised so far and at what value, or research their sales/results so far (I am happy to teach you how to do so - almost all the information is available online).
7. If prior investments have been made, check how much he/she invested each time?
8. Do your research on the market and potential.
You then take all the above, and reach the value of the company, based on which you are asking the investment for.
9. There ARE some companies that do startup evaluation, but these are relatively new (about 4 years) and usually use most of the above methods.
I've successfully helped over 350 entrepreneurs, startups and businesses, and I would be happy to help you. After scheduling a call, please send me some background information so that I can prepare in advance - thus giving you maximum value for your money. Take a look at the great reviews I’ve received: https://clarity.fm/assafben-david
Let us look at the pre-valuation methods that can be applied to Healthtech.
1. Berkus Method: The Berkus Methods was developed in the 1990’s by prolific angel investor David Berkus for application to pre-revenue start-ups. Berkus has stated that fewer than one in a thousand start-ups meet or exceed their projected revenues in the periods planned. Consequently, his method ignores the founder’s revenue and profit projections. In addition, the investor/valuer must be of the belief that the company will reach $20 million in revenue by the fifth year. A value is assigned to each of five key elements. Then these values are combined to derive the start-up valuation. The five key elements in the Berkus method are:
1. Sound Idea (basic value)
2. Prototype (reducing technology risk)
3. Quality Management Team (reducing execution risk)
4. Strategic Relationships (reducing market risk)
5. Product roll-out or Sales (reducing production risk)
2. Scorecard Method: This method was developed by angel investor Bill Payne. Key is a comparison between the target business and other similar start-ups.
Ignoring subjective financial forecasts, the first step when applying the Scorecard Method is to determine the average pre-money valuation of pre-revenue companies in the region and business sector of the target company. Without a thorough involvement in the industry this could be difficult in Australia (it is a lot easier in the United States).
Once you have this average valuation, adjustments are made by comparing the start-up to the perception of other start-ups within the same industry. Factors compared are:
1. Strength of the Management Team (0–30%)
2. Size of the Opportunity (0–25%)
3. Product/Technology (0–15%)
4. Competitive Environment (0–10%)
5. Marketing/Sales Channels/Partnerships (0–10%)
6. Need for Additional Investment (0–5%)
7. Other Factors (0-5%)
The valuation is then calculated by applying the weightings outlined above. Like the Berkus Method, the Scorecard Method ignores revenue forecasts. The problem with this method though is, firstly, the initial step of finding average start-up valuations in the area/industry is exceedingly difficult. Secondly, even with this data, one then needs to compare the target company with other start-ups, to undertake this step, one would need a very thorough knowledge and understanding of their local start-up market.
3. Risk Factor Summation Method: Like the Scorecard Method, it starts with the average pre-money valuation of pre-revenue companies in the region and business sector of the target company. Once the average value of pre-revenue and pre-money start-ups has been determined, it is then adjusted for 12 standard risk factors. This method forces investors and valuers to consider the various areas of risks which a venture must manage to achieve success. The 12 risk factors are:
2. Stage of the business
3. Legislation/Political risk
4. Manufacturing risk
5. Sales and marketing risk
6. Funding/capital raising risk
7. Competition risk
8. Technology risk
9. Litigation risk
10. International risk
11. Reputation risk
12. Potential lucrative exit
4. Values are attributed to each of the above factors which in turn are added/deducted from the average to determine the final valuation amount.
Below is an example of how these factors might be quantified:
1. Very Low (+$500k)
2. Low (+$250k)
3. Neutral ($0)
4. High (-$250K)
5. Very High (-$500k)
5. Venture Capital Method: The Venture Capital Method looks at what an investor requires in return for their investment. The VC Method was first described by Professor William Sahlman at Harvard Business School in 1987. The first step is to estimate the terminal value of the business at some point in the future, for example five years. The terminal value is the return the investor receives when they exit the company. The selling price can be estimated by determining an expected revenue level, and then applying industry specific profit margins. Finally, broad based earnings multiples are applied to the estimated net earnings. For example, a software company is expected to reach revenue of $30 million in five years. Average net earnings for software companies might be 20%, so a net profit of $6 million is used. Industry specific earnings multiples for software companies are then applies to the estimated profit. Let us assume 7x earnings, resulting in an estimated terminal value of $42m ($6m x 7). The second step is to compensate for the high risk involved with investing in start-ups. Let us say the investor requires a return of 20x their investment within the five-year timeframe. This would value the company at $2.1m post-money ($42m/ 20). If the founder and investor agreed on an investment of $500,000, this result in a pre-money valuation of $1.6($2.1m less $500k).
6. First Chicago Method: The First Chicago Method is essentially a variation on the Discounted Cash Flow method, constructed by combining three scenarios: Best Case, Base Case and Worst Case.This method supports the established premise that the value of a financial asset is the discounted value of its future cash flows. To that extent it aligns closely with established valuation theory and practice. However, it is still subject to the high sensitivity of the data being input in the model, however mitigated somewhat with the use of three scenarios.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
If you have a healthtec solution that is going to require regulatory approval, then you will be 'pre-revenue' for quite some time. This creates a challenge when it comes to early-stage valuation. Considering you can't market or sell a healthtec solution until approved or cleared by the regulatory agency (i.e., FDA), then typical valuation methods used in other industries aren't always the best approach to take.
The main drivers for healthtec startup valuation are IP, targeted patient population and data.
1. IP - most healthtec startups exit through acquisition by one of the big healthtec/medtech companies. The more solid your IP, the higher valuation. You need to have a different, unique, innovative solution to the healthcare problem that you are trying to solve.
2. Target patient population - this will define your available market. A solution that has the potential to affect more patients will drive a higher valuation. Keep in mind, larger patient populations (i.e., cancer, heart disease, diabetes) draw more competition ... which leads to the importance of item 1 (IP). However, the most important valuation driver in healthtec is ... data.
3. Data - without data to back up your claims for a clinical benefit behind your healthtec approach, you have very little value. Data in the medical field drives everything - regulatory approval, clinical adoption, company valuation. It's a data-driven industry. So, the quicker you can get data and the closer your data is to representing actual use, the higher your valuation. For example, animal data is more valuable than bench (in vitro) data. First-in-human (FIH) data is more valuable than animal data. Later stage (i.e. Phase II) clinical data is more valuable than FIH data. For this reason, most potential acquirers in the healthtec space won't be interested until you have human data.
So, keep protecting your IP, define your target population and continue to collect data to justify your approach.
1. Management Team
2. Business Opportunity
3. Product/Technology/ Intellectual Property
4. Strong backers/ supporters/ potential customers
There are many factors - but instead of trying to cover all the factors, you should focus on the above 4.
The reason is very simple, any quality/ strengths of the above 4 can be described in monetary terms easily and impact 80% of the business value.
"To capture a promising market with attractive product/ technology from a strong IP will lead to a profitable business in the future. With strong backers/ supporters/ potential customers, the chance of success will be much higher"