Understanding Startup Valuation Methods: A Founder’s Guide

How much is your startup worth?

It’s a question that can be somewhat difficult to answer. That’s largely because traditional valuation methods (i.e., Discounted Cash Flow) don’t work for startups, largely due to a lack of historical data and uncertainty over financial performance. Startups often operate in niche, emerging markets where comparable companies are minimal. Noting this, more qualitative factors such as the strength of the startup team, perceived market opportunity and more become more crucial to estimating potential worth.

So what methods are used to value startups at the various stages in their evolution? Early startups often rely on the Berkus Method, Scorecard Valuation Method, Cost-to-Duplicate Method and/or the Risk Factor Summation Method. More mature startups may rely on the Comparable Multiples Method, Discounted Cash Flow Analysis, Venture Capital Method and/or First Chicago Method.

The better startup founders can understand valuation and the methods that may be used to value their startup, the more informed and prepared they can be during fundraising and negotiation rounds. Read on to learn more about startup valuation methods:

How Are Startups Valued: The Fundamentals

Unlike a conventional business that’s valued based on historical financial data and present-focused metrics, startups are valued based on:

• Projections and assumptions
• Potential for market growth
• Potential for rapid growth
• Strength of founding teams and intellectual property
• Comparable market data (if it’s available)

Startups lack comprehensive historical data, which is why their valuation is more driven by future-focused projections. Valuation is largely based on growth potential and a belief in the product-market opportunity. However, there is a higher level of risk and uncertainty in such valuations, which can be driven by market uncertainty and economic volatility. This can impact investor sentiment and the average pre-money valuation by stage.

Pre-Revenue Startup Valuation Methods

Startups in pre-revenue stages are particularly hard to value because they lack truly meaningful revenue and financial metrics. That said, the Berkus Method is typically administered to value pre-seed startups. The Berkus Method values pre-revenue startups based on the quality of their fundamental assets and assigns potential values accordingly.

The Berkus Method for Early-Stage Startups

The Berkus Method evaluates pre-revenue startups based on five key value drivers and assigns a monetary value up to $500,000 for each one. These five key drivers include:

• The quality and potential of the idea
• The available prototype, product or service
• The quality of the management team
• Any present strategic relationships or partnerships
• Any existing product rollout or sales strategy

The Berkus Method helps founders understand their startup’s strengths and weaknesses. For instance, perhaps a startup’s idea and prototype were both valued high, at $500,000 each, but the management team was valued at $100,000 and the other categories were only valued at $50,000. That brings the total valuation to $1.2 million out of a possible $2.5 million.

Scorecard Valuation Approach

Another pre-revenue startup valuation approach is the Scorecard Valuation Approach, which compares the startup to similarly funded startups in similar industries to create a benchmark average valuation using a weighted scorecard. Relative scores are assigned according to the following categories:

• Strength of the management team
• Potential of the opportunity
• The product, service or technology
• The competitive environment
• Existing marketing or sales channels
• The need for additional investment
• Other factors

Scoring is assigned via percentages based on perceived importance to the startup and the weight of each factor is multiplied by the relative score to get the true weighted score. The Scorecard Valuation Approach provides a more structured and systematic way to assess qualitative factors and is often favored by angel investors.

Revenue-Based Startup Valuation Models

Startups with some historical financial data are valued differently from pre-revenue startups. Valuation is often done using revenue multiples and growth-adjusted metrics, and adjusted accordingly to produce an accurate valuation consistent with business valuation benchmarks and defensible future growth projections.

SaaS Valuation Multiples

SaaS startups are largely valued based on ARR multiples, with the multiple reflecting growth, retention and other factors, like NRR, market demand and the startup’s current state of profitability. The core formula is as follows:

• Valuation = ARR x revenue multiple

ARR is the predictable revenue, while the multiple is based on the growth rate. High growth rates correlate with high ARR multiples. NRR helps measure a startup’s ability to keep existing customers and expand revenue through upsells or cross-selling. Other factors that may influence the multiple include market conditions, profits vs. growth and market demand.

The Rule of 40 can also affect SaaS startup valuation. This rule states that your startup’s combined revenue growth rate and profit margin should total at least 40 percent to indicate a healthy operation.

eCommerce and Marketplace Valuations

Transaction-based startups have different valuation considerations compared to subscription-based ones. In transaction-based business models, revenue depends on sales rather than recurring subscriptions. Market multiples still apply, but there’s a greater focus on customer behavior, market volatility and the quality of your startup’s earnings.

Gross merchandise value (GMV) multiples, which can range from 1 to 5, are often used to show market presence and growth potential. Net Revenue multiples represent actual earnings and tend to be higher than GMV multiples depending on factors such as growth, margins and overall brand strength. Inventory requirements and working capital needs are also accounted for in eComm validation, and adjustments are made for CAC and lifetime value ratios.

DCF and Risk-Adjusted Valuation Methods for Startups

High-growth, high-risk startups tend to use the Discounted Cash Flow (DCF) and risk-adjusted valuation methods. DCF is adapted for high-risk startups by using higher discount rates to reflect risk, performing a detailed scenario analysis and applying probability-weighted cash flows. These can all help account for higher failure rates and market unpredictability, creating more investor-ready financial models grounded in financial projections and future cash flows for venture capital.

Comparable Company Analysis for Startup Valuations

Another technique for startup valuation is finding and applying comparables. This is best done by identifying similar startups in the same industry, at the same stage and with a similar business model. Once these similar startups are identified, work to gather financial data and transaction metrics from recent funding rounds or other activity. Valuation multiples can be calculated from this data and applied accordingly to your startup’s metrics. However, you should keep in mind to account for qualitative differences, such as growth potential, market size, etc.

Recent Transaction Comparables

Recent funding rounds or transaction data from identified similar startups can be used to create benchmark valuations. Keep in mind that similarity is key — you should be focusing on companies that are as close as possible to your startup. Use resources like Pitchbook, CB Insights or other databases to find data such as:

• Revenue
• ARR
• User base or growth metrics

From here, you can contextualize and adjust accordingly for differences.

Public Company Comparables

Public market multiples should be coordinated with appropriate adjustments for your startup. For instance, consider using an average or median multiple to calculate a preliminary valuation. Growth rate differentials and margin profiles must also be considered. Finally, don’t discount the volatility in public market valuations, which can shift investor interest and pacing among venture capital firms.

409A Valuations vs. Investment Round Valuations

There are key differences between compliance valuations and investment valuations. Compliance valuations determine the asset or value to meet legal and regulatory requirements, while investment valuations assess the potential to generate future returns for investors.

IRS Section 409A governs the taxation of non-qualified deferred compensation, requiring startups to use a safe harbor to avoid tax penalties. All startups should update their 409A valuation at least once a year or when a significant event occurs that could impact the startup’s value.

How to Evaluate a Startup for Investment: The Investor Perspective

When determining valuations, both qualitative and quantitative factors must be prioritized. These include the quality of your team, market size and competitive positioning. They also include the product-market fit and growth trajectories, and scalability and defensibility of the business model.

Market Size and TAM Analysis

One key factor to support valuation arguments is the total addressable market (TAM). TAM is the total potential market, assuming a 100 percent share with no competition. Serviceable addressable market is a subset of TAM that determines the realistic market that can be served. Serviceable obtainable market (SOM) is the most realistic and specific market segment, which is the market your startup can reasonably expect at its current state.

Traction Metrics That Drive Valuations

Various KPIs also influence investor decisions. These include:

• Growth rate
• Cohort retention
• Unit economics

Improving such metrics can help create operational leverage and improve valuation.

Negotiating Your Startup Valuation

With the right valuation strategies and properly valuing your startup, you can turn such information into practical negotiation strategies for better funding outcomes. Do this by building competitive dynamics through parallel processes, structuring terms to maximize post-money valuations and balancing valuation with investor quality.

Maximize Your Startup Valuation with Strategic Financial Leadership

For more information on startup valuation and for help optimizing your financial metrics and overall positioning to drive higher valuations, contact Graphite Financial today. At Graphite, we specialize in working with startups via Fractional CFO services and can help put your startup in a position to appeal to investors and reach new heights. Contact us today to schedule a consultation.

Frequently Asked Questions

What is a typical pre-seed startup valuation?

Pre-seed valuations significantly vary by industry, the current market and an investor’s perceived return on investment. According to various data sources, the median pre-seed startup valuation in 2025 is about $5 million. Again, this number can significantly vary based on factors like waitlists, pilot customers and more.

How do you calculate startup valuation using revenue multiples?

This is done by multiplying the startup’s total annual revenue by a comparable industry revenue multiple. This comparable industry revenue multiple is found by gathering sales or valuations of similar startups or other companies on the market. It involves researching appropriate industry multiples and applying them to a startup’s revenue, then making the necessary adjustments based on growth potential, profitability, marketing factors and more.

What’s the difference between pre-money and post-money valuation?

As the name implies, a pre-money valuation is the valuation of a startup prior to an investment, while a post-money valuation is the value after a new investment is added. The biggest difference is typically the investment amount. Pre-money valuations provide an outlook on the startup that helps set the stage for negotiations and calculating the investor’s share, while post-money valuations demonstrate the total worth of the startup once the investment is integrated to help show an investor’s percentage of ownership.

How often should startups update their 409A valuation?

All startups should update their 409A valuation at least once a year. However, it’s also best practice to update it when a significant event occurs that could impact the startup’s value. These may include funding rounds, a significant business change or financial challenges. 409A valuations serve as a safe harbor from IRS penalties and help ensure stock options are fairly priced. Regular updates also help instill investor confidence.

What valuation method is best for SaaS startups?

There is no single best valuation method for SaaS startups. The method you select should depend on various factors, such as your startup’s stage, its growth potential, profitability and more. Annual Recurring Revenue multiples are a common valuation method for high-growth startups, while Seller Discretionary Earnings tend to be better for smaller ones. Another valuation method is EBITDA multiples, which is best for larger, more mature SaaS startups.

How do down rounds affect startup valuations?

Down rounds will reduce your startup’s valuation. They dilute existing stakeholders and make future funding more difficult to secure. Down rounds are a sign of financial challenges and can result in decreased confidence. They’re a signal to the market, investors and potential partners that your startup is being challenged, which can thereby lead to reputational damage.

What factors most influence Series A valuations?

Series A valuations tend to blend data with the investor’s perceived assessment of a startup’s market potential. They differ from seed rounds, as investors want to see proof of market fit and scalable growth. For this reason, key metrics like CAC, LTV, retention rates, ARR and churn are often considered in the valuation. Investors also weigh scalability and the ability to handle rapid expansion, and will assess the competitive landscape and size of the market the startup is operating in.

How do you value a startup with no revenue?

Early-stage startups that aren’t yet generating revenue can be difficult to value properly. However, there are valuation methods that focus on pre-revenue indicators such as the overall strength of the management team, market opportunity, product potential and market traction. Some of the common methods to value startups that aren’t yet making money include using the Berkus Method, the Scorecard Method, the Cost-to-Duplicate Method and the Risk Factor Summation Method.

What valuation multiples do VCs typically use?

Venture capitalists tend to use a combination of valuation methods, the most common being Enterprise Value (EV) to Revenue and Enterprise Value to EBITDA. The multipliers vary by industry, the stage of your startup and its growth potential. The EV/Revenue method is most commonly used for tech and SaaS startups with rapid scalability potential, with the multiplier applied to the current or projected revenue. EV/EBITDA is more common with startups that have stable, yet slower growth. These often include eComm and HealthTech startups.