Most valuation procedures for startup companies are based on the revenue and profit forecasts of the founders, usually made in a business plan. But as the Bavarian comedian Karl Valentin once formulated: All forecasts are difficult, especially when they refer to the future.

There is also the problem that no such forecasts are available in this very early phase where there is only a business idea and no business plan.

The Berkus method attempts to circumvent this problem of quantifying something which is not (yet) quantifiable at all.  It goes back to the American business angel and venture capitalist Dave Berkus (* 1941) and takes into account five qualitative value drivers to determine the company value:

Value driver
Objectives
Maximum added value
Valuable business model Base value US$ 500,000
Available prototype Reducing technology risks US$ 500,000
Abilities of the founding or management team Reducing implementation risks US$ 500,000
Strategic relationships Reducing market risks US$ 500,000
Existing customers or first sales Reducing production risks US$ 500,000
Maximum company value: Reducing investment risks US$ 2,500,000

For each of these value drivers, Berkus assumes a maximum added value of US$ 500,000, explicitly indicating that these are maximum values which can also be undercut. This results in a maximum company value of US$ 2,500,000 (for convenience only in euros) requiring all five influence factors.

Only when the company achieves sustainable sales the Berkus method is replaced by other valuation procedures. Berkus is cautiously assuming that the startup company should exceed sustainable sales of US$ 20 million as of the fifth financial year (taking into account that the method was developed in the 1990s).

Sources: 

Dave Berkus, The Berkus Method – Valuing the Early Stage Investment, published on berkonomics.com on Nov 4, 2009.

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The Berkus method provides a first idea of the value potential of your company. However, it can only be adopted when the underlying value drivers are determined. This is done after successfully answering the Seven Key Questions.

 

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