The more common valuation techniques used in practice today focus on the cash flows or earnings generated by a business; however, how does one value a business that doesn’t even have any sales yet, let alone positive cash flows? This is a frequently encountered issue when valuing start-up businesses who may have a great idea that has not been monetized yet. Set out below are some of the current methodologies used in the marketplace.

Berkus Method – This method assumes that the company being valued has the potential to reach $20M in revenues within 5 years. This method breaks down five milestones that a company in the start-up phase would hit along the development of the product or service. As each milestone is hit, up to $500K is added to the company’s value to a maximum value of $2.5M.

The Scorecard Method and Risk Factor Summation Method – The scorecard and risk factor summation methods both compare a start-up company to other start-ups that have recently raised capital. The risks of the company are weighted and a score is given in each category. The total score is then multiplied by the average start-up enterprise value.

User lifetime value – In this method, the value of the company is derived from the value each user of a site, service or application would be expected to generate for the company. It can also be adjusted for the expected growth rate of the user-base over time.

Traffic value multiple – This multiple is based on the level of traffic the website receives based on its top search keywords and the cost to acquire those keywords on a cost per click on Google.

If a company in the beginning stages is looking for capital, it would be worthwhile to use multiple methods to arrive at a value of the opportunity. Additionally, as many of these methods are qualitative in nature, well supported assumptions and comparisons to other funded companies should be used whenever possible.