How to do a Startup Valuation using the Risk Factor Summation Method
Originally published: 04/12/2017 15:12
Publication number: ELQ-16232-1
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How to do a Startup Valuation using the Risk Factor Summation Method

A startup valuation methodology that considered a broader range of factors in determining the pre-money valuation.

Introduction

The Risk Factor Summation Method, described by the Ohio TechAngels, considers a much broader set of factors in determining the pre-money valuation of pre-revenue companies. This method may be less useful as a stand-alone valuation method for investors, but it is my opinion that this method should be one of several methods used by early stage investors to establish pre-money valuation, because it forces investors to consider important exogenous factors.

  • Step n°1 |

    The Method

    The Ohio TechAngels describe the method, as the following: ”Reflecting the premise that the higher the number of risk factors, then the higher the overall risk, this method forces investors to think about the various types of risks which a particular venture must manage in order to achieve a lucrative exit. Of course, the largest is always ‘Management Risk’ which demands the most consideration and investors feel is the most overarching risk in any venture. While this method certainly considers the level of management risk it also prompts the user to assess other risk types,” including:


    > Management
    > Stage of the business
    > Legislation/Political risk
    > Manufacturing risk
    > Sales and marketing risk
    > Funding/capital raising risk
    > Competition risk
    > Technology risk
    > Litigation risk
    > International risk
    > Reputation risk
    > Potential lucrative exit

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