Valuation Metrics: DNA processing Healthcare Startups
Three valuation methods that can be applied to healthcare startups or early-stage companies are the Scorecard Method, Berkus Method, and Venture Capital Method.
VALUATION METRICS FOR HEALTHCARE STARTUPS
- The Scorecard Method also called the Bill Payne valuation method, is used to compare pre-revenue startups to funded startups.
- The method works by adjusting the average valuation depending on factors like stage, market, and region.
- This method uses the average pre-money valuation of other seed/startup businesses and then judges the startup that needs valuing against them using a scorecard to get an accurate valuation.
- The first step is to find out the average pre-money valuation of pre-revenue companies in the region and the business sector of the target startup.
- Next, the pre-money valuation of pre-revenue companies is obtained using the Scorecard Method to compare. The scorecard judges the strength of the management team (0-30%), size of the opportunity (0-25%), product/technology (0-15%), competitive environment (0-10%), marketing/sales channels/partnerships (0-10%), need for additional investment (0-5%), and other (0-5%).
- Finally, a factor is assigned to each of the above qualities based on the target startup, and then the sum of the factors is multiplied by the average pre-money valuation of pre-revenue companies.
- Prolific angel investor Dave Berkus created the Berkus Method which measures both qualitative and quantitative factors to deliver a valuation based on five critical components.
- The various parts can each be assigned a price of up to $500,000 for reducing risk.
- The five components evaluated include a sound idea (basic value), the prototype (reducing technology risk), the quality management team (reducing execution risk), strategic relationships (reducing market risk), and product rollout or sales (reducing production risk).
- At a perfect score, a startup’s valuation is capped at $2.5 million.
Venture Capital Method
- The Venture Capital Method (VC method) is one of the methods for showing the pre-money valuation of pre-revenue startups.
- According to these methods, the return on investment (ROI) is equal to the terminal (or harvest) value divided by the post-money valuation.
- Post-money valuation is equivalent to the terminal value divided by the anticipated ROI.
- Terminal (or harvest) value refers to the startup's anticipated selling price in the future, estimated by using a reasonable expectation of revenues in the year of sale and estimating earnings.
To provide some valuation metrics that can be used for Healthcare startups specialized in DNA analysis, your research team first searched for the valuation methods of DNA processing/analysis startups. From this search, the team arrived several sources with lists of some valuation methods for startups. Other sources discussed the steps required to start up a company. From all the sources, one report specifically focused on healthcare startups. However, the methods mentioned apply only to public companies listed in stock exchanges. The team then narrowed the search to focus on the valuation methods used by pre-revenue healthcare startups, since none of the identified reports specifically talked about those that specialize in DNA analysis.
Your research team looked at the various methods listed, with interest into those that can be used to value healthcare startups. The team looked at those methods and found that pre-revenue companies do not use revenue multiples. The methods highlighted are universal and apply to various industries, including healthcare. For each method, the team gave an overview of what they entail.