These methods – developed by different groups of U.S. business angels specialized in pre-revenue investments – base valuation on traits considered to guarantee higher success probabilities. Thus, they assess verifiable, actual characteristics, avoiding hypotheses and assumptions about the future.
Indeed, plans might change (new opportunities, new threats, new information about demand or competition, etc.), and the related financial projections with them. Traits such as a highly skilled and connected core team, a solid idea, a growing demand in the market, etc., though, will always tell an investor that a startup has the core resources to overcome difficulties and succeed.
Why two qualitative methods
The two methods allow Equidam to enhance the valuation through a broader taking on the qualitative approach. In fact, despite sharing the founding concepts, the methods differ in the set of traits they investigate, and – most importantly – in how they build the valuation.
- The Scorecard method analyzes whether a startup is doing better or worse than an assumed average company
- The Checklist method computes the valuation as the sum of intangible building blocks.
Resource-focused VS asset-based methods
Even though they treat traits as resources, no qualitative method is asset-based. Traits cannot be sold or separately appraised (unlike patents, goodwill, accrued R&D expenses, etc.), but it is their combination that drives the value of the startup as a whole.
A healthy company is like a living organism: the value of the parts working together toward a purpose is higher than their sum. Asset-based methods represent the latter approach, being thus more suitable to compute the value of a distressed firm needing to be liquidated. Equidam’s methods focus on firms exploring their opportunities: they must consider resources that are combined, not separate.