This method was conceived by William H. Payne of Ohio TechAngels group and endorsed by the Kauffman foundation. The analysis of the qualitative traits aims to identify whether a startup is better or worse than the assumed average of a set of comparable companies.

The process unfolds in three steps:

  • The average pre-money valuation is computed over a set of comparable market transactions, outliers excluded
  • For each of the six criteria adopted by the method, a startup is given a score according to whether it over- or under-performs the assumed average company
  • The weighted average of these scores of the criteria determines the percentage difference between the average valuation from the first step and a startup’s pre-money valuation

Criteria and weights

The following table reports the criteria used and their weights, which reflect the relevance of the characteristics of a given criterion on the valuation.

How to determine the scores of the criteria

Through the answers in the Questionnaire tab of the platform, Equidam gathers information on the qualitative traits of the company and compares each one of them to what the method assumes to be the characteristics of the average startup.

Each trait is scored according to how much it diverges from the assumed average: 0 if on the same level of the assumed average, more if representing a more desirable situation from an investor’s point of view, less otherwise. The sum of these outcomes is the score of the criterion.

What follows is a short description of the criteria and the related qualitative traits:

Strength of the team looks at how experienced and skilled the team is, as well as how tight the members’ bonds with each other are. It analyzes:

  • Time commitment of the founders
  • Number of employees
  • Team spirit and comradeship
  • Years of industry experience of the core team
  • Business and managerial background of the core team
  • Technical skills of the core team

Size the opportunity considers how wide can be the scope of the venture in money and geographical terms. It analyzes:

  • Estimated revenues in the third year given the stage of the development
  • Estimated size of the market in three years
  • Geographical scope of the business

Strength and protection of the product/service checks whether the startup is able to defend its position in the market. It analyzes:

  • Stage of the product/service roll-out
  • Degree of loyalty of customers
  • Type of IP protection applicable
  • IP protection in place (if any)

Competitive environment studies complements the prior criterion by focusing on how competitors may act. It analyzes:

  • Level of competition in the market
  • Quality of competitive products/services
  • Competitive advantage over other products/services
  • Barriers to entry to the market
  • Threat of international competition

Strategic relationships with partners queries if the network to support the activity is already in place. It analyzes:

  • Strength of the relationships with key strategic partners

Funding required controls if it is likely the startup will need further investments in future periods. It analyzes:

  • Capital required given the stage of development

Example

Pointify is a German startup working on a music sharing service. After filling out the questionnaire, their results per criteria are the following:

  • 0.00 Strength of the team, which will be weighted 30%
  • Derived from full-time committed founders (0), no employee apart from them (-0.25), them having known and worked with each other for more than 5 years (+0.5), few years of industry experience (-0.25), former mid ranking position held by a team member (0), and only some of the relevant technical skills present (0). The sum of the trait scores – i.e. the score of the criterion – is 0 
  • 0.50 Size of the opportunity, which will be weighted 25%
  • -0.25 Competitive environment, which will be weighted 10%
  • 0.25 Strength & protection of product/service, which will be weighted 15%
  • 0.00 Strategic relationship with partners, which will be weighted 10%
  • -0.20 Funding required, which will be weighted 10%

The weighted average of the scores is 

0*30% + .50%*25% + ... + (-0.20)*10% = 11.75%

That is the difference between the average startup valuation in Germany and Pointify’s valuation. 

Given the former amounts to EUR 2,293,387, Pointify’s pre-money valuation is 

EUR 2,293,387 * (1 + 11.75%) = EUR 2,562,860.

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