5 tools which help you evaluate crowdfund investments

Investment evaluation tools have been designed to take the guesswork out of the process and help crowdfunding investors make more informed decisions.

Here are five tools that can help you establish startup valuations and make better decisions to achieve higher crowdfunding returns.

The Scorecard Method

The Scorecard method evaluates startups using data across the industry and weighted percentages derived from quantitative analyses. This method is used for companies that are in the pre-revenue stage.

The Scorecard valuation method has four steps. In the first step, you should perform a pre-revenue valuation of businesses operating in the same industry and geographical location. The reason for considering these two factors is that pre-money valuation varies across different regions and businesses. 

The method has a list of factors for determining the valuation of companies in the industry. They include the strength of entrepreneur and team, size of the opportunity, product/technology, competitive environment, marketing/sales/partnerships, the need for additional investment, and other factors

Each factor has a maximum percentage assigned to it. Determine the percentage for each company in the region and industry and add up the percentages. 

Next, do the same for the target company. Assign scores to each factor that you think will be close to reality based on the investigations you’ve made on the startup. You can determine these scores by answering a set of multiple-choice questions. Then, you need to sum up all the scores. 

Finally, multiply the percentages and scores to get the final valuation of the target startup.

Omni Calculator’s Pre-money and Post-money Valuation Tool

This calculator gives a general estimate of the key values in startup valuation using simple, multi-directional math. It involves both pre- and post-valuation to help you make an informed decision for your crowdfunding investment. Pre-valuation means how much money the startup is worth before it attracts investment. Post-valuation refers to the company’s value after investment flows in. The calculator features four key components, namely investor’s equity, pre-money, and post-money valuation, and the investment amount. You provide two of these values, and the tool gives you the other two. 

Venture Capital Valuation Method

First introduced by Professor Bill Sahlman at Harvard Business School in 1987, the VC valuation method is one of the most effective valuation tools for investors. This straightforward approach is based on the following formulas:

ROI = terminal value / post-money valuation

Post-money valuation = terminal value / anticipated ROI

Now, what does each of these terms represent? Terminal or harvest value is the selling price that you anticipate for the company in 5 to 8 years from now. To estimate the selling price, decide what you expect to achieve in revenue during the year of the sale, and determine earnings based on that revenue.

For example, if a company has $10 million in revenue in the harvest year, its post-tax earnings of 15% are expected to be $1.5 million. Each industry has its own Price/Earning ratios that we can use to determine the Terminal Value. So, 15 multiplied by 1.5 will yield an estimated Terminal Value of $22.5 million.

Through the second formula, you should assume what the expected ROI is in your industry and how much investment you should make to achieve positive cash flow. To estimate pre-revenue valuation, subtract the amount of investment from the post-money valuation.

Risk Factor Summation

This method is a tool that probably requires the highest number of factors for determining an early-stage company valuation for investing in crowdfunding.

In order to use this tool, you need to take into account all possible risks that the startup might face. The most important ones are the international risk and risks related to litigation, legislation, manufacturing, funding/capital raising, sales and marketing, competition, technology, political reputation risk, and potentially lucrative exit.

Then, you should assign numerical values to how you assess each risk. There are five numerical values from -2 to +2, from very negative to very positive. Then, every +2 will be set to represent £200,000, and every -2 equals -£200,000 (every +1 equals £100,000). For example, if the litigation risk is very negative, it will subtract £200,000 from the total value of risk.

The Berkus Method

The Berkus Method is a traditionally used tool for startup valuation based on five features of a company. These components are a sound idea, working prototype, product rollout or sales, quality board of directors, and quality management team. Then, assign a maximum of £400,000 to each component. For example, if the company has a sound idea and a good working prototype, its valuation is £800,000. 

Bottom Line

It’s difficult to determine the valuation of a company before it has started working because startups are exposed to many market forces, have no revenue, and demonstrate high levels of uncertainty. That’s why, instead of quantitative approaches, crowdfunding investors should use qualitative methods with some degrees of subjectivity to determine the valuation of a company.

The valuation tools introduced in this article are among the widely-used methods by investors. It is best to use a combination of these tools to achieve the highest degree of certainty.

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(Featured image by Chronis Yan via Unsplash)

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