#startupvaluation

3 Important Startup Financials to Understand

Startup Rating Scale.png

At a high level, when evaluating the financials of a startup, you can generally group it into one of the following buckets:

  1. Pre–revenue
  2. Breakeven
  3. Profitable

Unicorns are companies that are given a $1 billion valuation by investors and venture capitalists, and potential unicorns exist in each of these buckets. Unicorns are not always easy to spot, so how do you know what to look for?

Three key questions to ask when analyzing a startup’s financials?

  1. Is the startup growing sustainably?
  2. Is there a clear path to breakeven and profitability?
  3. In order to earn investors a strong return, what does this startup need to accomplish before its next round of financing, and how realistic are those goals?

Show Me the Money!

There’s nothing better than a startup that is already in the black. They don’t need your money, which makes you want to give it to them all the more!

But profitable startups are a different animal. In this case, the unicorn (or potential unicorn) isn’t hard to spot – the company is already throwing off cash, and you and every other investor is fighting to get in!

Instead, the key risk is whether or not you’re overpaying for the unicorn, and how hard and fast the unicorn can run.

Three key questions to ask when analyzing a profitable startup are:

  1. Why is this company able to achieve profitability?
  2. Where are the untapped areas of growth, and why would a capital infusion not only increase, but turbocharge growth?
  3. What metrics do you need to hit to give investors a return of three to ten times capital?

You can also join our newest course to give you inside access to the hottest startups in the world. 

We’ll help you find the next billion-dollar startups so you can be part of the future and get an enormous return by angel investing.

5 Proven Ways To Find The Next Billion-Dollar Product

5 Proven Ways To Find The Next Billion-Dollar Product

“What has been will be again. What has been will be done again. There is nothing new under the sun.”

– Ecclesiastes 1:9

How To Use The Berkus Method To Calculate Startup Valuation

We'll cover five different methods for valuing startups, concentrating on valuing early startups and those that are in pre–revenue stages, starting with:

The Berkus Method

This method, which is used and defined by active angel investor David Berkus, involves a lot of estimation. The reason Berkus came up with the method is that he personally found that lengthy revenue forecasts rarely turned out to be accurate. According to Berkus, only 1 in 20 startups hit revenue forecasts, so he opted for an "eyeball" approach using a few key elements. The method applies best to technology companies, but can be applied to other products.

First, Berkus says that investors should believe the company has a potential to hit $20 million or more in revenues by the 5th year of operation. Then, he applies a scale to five components of a startup, rating each at up to $500,000. The components are:

  • The startup has a sound idea–a product that provides a basic value with acceptable product risk
  • There is a prototype, which reduces technology risks
  • The startup has or plans for a quality management team to reduce risks in execution
  • Strategic relationships are already in place, reducing risks for competition and market
  • Product rollout and sales plans exist (not applicable to all pre–revenue startups)

Using the method, the highest valuation would be $2.5 million; a pre–revenue startup could only score $2 million.  This is a very back–of–the–envelope method, but it can be a useful tool for angel investors evaluating startups in the earliest of stages.

Some disadvantages do exist with the Berkus Method, however, illustrating the point that no type of data should be considered in a vacuum. For example, this method doesn't consider market or competitive environment, which may be of importance in many situations.  


Get a copy of our official guide to venture capital and angel investing by becoming a member of Angel Kings - the Angel Investing Experts. And learn from the angel investing and venture capital expert, Ross Blankenship.

Ross-Blankenship-expert-investor

Ross Blankenship is an expert on startup funding, angel investing and venture capital.

Ross Blankenship is also the Founder and CEO of AngelKings.com.  Angel Kings is an investing platform that provides accredited angel investors the opportunity to invest in top startups and companies in sectors like cyber security, biotech, mobile, data and financial services.  Angel Kings provides both venture capital funds for startup investing as well as private equity funding for early and middle-stage investments.



Angel Kings Topics: How To Value A Startup

We've all heard the different numbers that investors and startup founders come up with when it comes to their startup valuation.  Sometimes a founder may say they're worth $3 million, while investors may say, they're only worth $1.5 million.  But how do they come up with these numbers?  Why are they different?  

Watch the video below to learn about the valuation methods Ross Blankenship discusses in his book, Kings Over Aces.  Each method will be discussed further in the following posts.


Would you like to invest in startups and become a venture capitalist? The VC expert is ready to help you start invest in top startups. See how you can by becoming a qualified member at HERE.

Ross-Blankenship-expert-investor

Ross Blankenship is an expert on startup funding, angel investing and venture capital.

Ross Blankenship is also the Founder and CEO of AngelKings.com.  Angel Kings is an investing platform that provides accredited angel investors the opportunity to invest in top startups and companies in sectors like cyber security, biotech, mobile, data and financial services.  Angel Kings provides both venture capital funds for startup investing as well as private equity funding for early and middle-stage investments.