The Berkus Method: Valuing an Early Stage Investment.

Everyone wants to know the value of their business at some time in the process of raising money, thinking of selling a small business, or just out of plain old curiosity.

Some businesses, such as professional service businesses that carry the name and professional reputation of the entrepreneur, cannot be valued using any of the traditional methods - and there are ten of those (at least). But early stage businesses, especially those attempting to raise capital, are especially difficult to value. As you'll read, it was this problem that I addressed with a simple formula almost two decades ago, and which has become a widely-used tool by investors to approach this problem with some sort of uniformity and professionalism.

To get to the actual formula, read this short introduction, and then click at the bottom of this email over to the Berkonomics website for the formula itself. May this help those of you needing order out of chaos, in your attempts to value young companies that are pre-revenue.

All the best,

The Berkus Method: Valuing an Early Stage Investment.

For those of us who’ve invested in early stage companies, especially technology startups, we have confronted a universal problem. There are many ways to project the value of a company for purposes of pricing an investment, but all rely upon the revenue and profit projections of the entrepreneur as a starting point. Many formulas then discount those projections according to some set percentage or by assigning weight to elements of the enterprise.

And in my opinion, all fail to take into account the universal truth – that fewer than one in a thousand startups meet or exceed their projected revenues in the periods planned.

Years ago, confronted with the same conundrum, in the middle 1990’s I came up with a method of assessing the value of critical elements of a startup without having to analyze the projected financials, except to the extent that the investor believes in the potential of a company to reach over $20 million in revenues by the fifth year of business.

First published widely in the book, Winning Angels by Harvard’s Amis and Stevenson... To read the rest of this insight and calculate your valuation using the Berkus Method, click HERE to go to the full posting in the blog at http://berkonomics.com.

To catch up with past insights or to make comments for all to share, go to www.berkonomics.com .