How to value a startup in Dubai

Any entrepreneur looking for investment will need to show the value of their company. This involves more than explaining its business plan, objective or even its assets. Investors are looking for a monetary value to give them an idea of how far their money will go – and what return they are likely to receive in the future.

This process of valuation can be difficult for pre-revenue startups with little tangible proof of worth. However, it is not impossible. In this article, I’ll look at the seven best ways to value a startup with no revenue, including:

• Berkus Method
• Risk Factor Summation Method
• Combo Platter Method
• Scorecard Valuation Method
• Value Valuation
• Cost-to-Duplicate
• VC Method

Methods to value a startup in Dubai

Establishing a pre-revenue valuation is not an easy task. But there are several methods that can help you come to a conclusion that satisfies both you and your investors. Below are some of the most effective.

Method 1: Berkus Method

Created by famous angel investor Dave Berkus, the Berkus Method asks entrepreneurs to assess their business across five key pillars or business drivers. The five areas are:

• Concept
• Prototype
• Quality management
• Connections
• Launch plan

The maturity or development of each of these areas will dictate its value. Each pillar is rated against a maximum value of USD 500,000. The concept is based on the fact that each of these drivers will significantly affect a company’s ability to reach its goals and avoid failure.

Once assessed, the totals of each business driver are added together to give a grand total, and that is the value of your startup.

Method 2: Risk Factor Summation Method

This method combines aspects of the Berkus method, among others. In this approach, ten common risk factors are scored on a scale of -2 to +2. The bottom end of the scale is high risk and is valued at USD -500,000, while the high end is low risk and valued at USD 500,000.

In other words, the value of the startup will increase by USD 250,000 for every point it scores in the assessment and fall by USD 250,000 for every minus point it scores. The areas of assessment are as follows:

• Management
• Stage of the business
• Funding/capital risk
• Manufacturing risk
• Technology risk
• Sales and marketing risk
• Competition risk
• Legislation/political risk
• Litigation risk
• International risk
• Reputation risk
• Potential lucrative exit

This method is often combined with the scorecard method to give a reliable overall idea of pre-revenue startup value.

Method 3: Combo Platter Method

This method was invented by Rich Palmer, co-founder of a startup that specialises in using AI to aid fundraising efforts. When his company was looking for backers, he and his team combined and built on several other valuation methods.

The core concept of the Combo Platter Method is a best, moderate and worst-case scenario. Using this as the template, the startup is valued using the Berkus and Risk Factor Summation methods to further refine the figures.

The outcome is a scope of valuation accounting for risk and showing investors what they can expect in the best and worst cases. Evidently, the method was a success, as Palmer’s AI startup secured USD 1m in seed funding.

Method 4: Scorecard Valuation Method

This may be the most popular startup valuation method on this list. Used largely by angel investors, it uses a comparison model to assess value against already funded startups.

The first step is to calculate the average valuation for pre-revenue startups occupying the same space. Next, you compare those startups with your own against the following metrics:

Strength of management team (0–30%)
The more experienced your founding team has, the more valuable your business. If you have already attracted some top talent or high-profile support, you can likely command more than if your business is currently only backed by you and your family or friends.

Size of opportunity (0–25%)

This will depend on the size of your market and any interest you have already garnered in your offering. Warm leads or committed purchases can prove very valuable in this area. Keep in mind that investors like to spread risk, so 100 customers willing to spend USD 500 is more attractive than one customer willing to spend USD 50,000.

Product (0–15%)
This is simply the value or worth of your product or service. In most cases, this is the easiest area to assess.

Competitive environment (0–10%)

Here you will need to consider whether you are entering a crowded or saturated market or if there is still room for a new player. The key here is your USP. If you are filling a gap that is currently unserved, then your startup will be more valuable.

Marketing and sales channels (0–10%)

This requires more research to determine whether your potential customer base is growing and at what pace. Investors will buy in to markets on the up, whereas declining interest in your field will cause concern.

Need for additional investment (0–5%)

Another simple area for assessment, here you will need to outline how much more investment is required before you anticipate offering a return.

Other (0–5%)
Any other areas that could impact valuation.

Of course, like most valuation methods, the criteria here are largely subjective. However, the more factors you assess individually, the more able you are to address any concerns put forward by investors.

Method 5: Value Valuation

This is perhaps the most straightforward way to assess the value of a pre-revenue startup. In short, you simply take the initial costs of the company’s assets offsetting for depreciation and add the total value of any additional assets or cash, less any debts or expenses.

The final figure is the value of your startup.

However, while simple, it only offers a current value for your business. The method does not take into account future growth or revenues. For that reason, this approach is less favoured by investors.

Method 6: Cost-to-Duplicate

This approach is similar to Value Valuation in that it produces a current value rather than a future value.

With this method, you must total the value of the physical assets of the startup and calculate how much it would cost to replicate. This is useful information for investors, as they are usually unwilling to invest more than market value in this early stage.

However, as it is a very objective approach, it leaves no room to account for the growth of the business as it hits milestones throughout its lifecycle.

Method 7: VC Method

Popularised by the Harvard School of Business, the VC Method is commonly used to determine the value of pre-revenue businesses.

The first step is to calculate the Terminal Value of the business in the harvest year. Terminal Value is the expected worth of the business at a specific date in the future, whereas harvest year is when the investor plans to exit the business.

To calculate Terminal Value, you multiply the projected revenue, projected margin and stock price to earnings ratio, like this:

Projected Revenue X Projected Margin X Stock Price to Earnings Ratio = Terminal Value

Once you have this figure, you can track backwards using the investment amount and required ROI to give a pre-revenue valuation. So:

Pre-Money Valuation = Terminal value ÷ Required ROI – Investment amount

What is Dtec?

Dtec is the largest technology innovation hub in the MENA region, home to hundreds of startups, SMEs and tech entrepreneurs from across the globe.

We help entrepreneurs make their way in Dubai, and we know how to make the company formation, investment and growth process as smooth and easy as possible.

As well as support and guidance, Dtec can offer your startup a wide range of benefits, including 24/7 access, high-speed WiFi, a wide range of meeting and event spaces and comfortable flexi and permanent office spaces. Other benefits include 100% business ownership, visa processing, accelerator programs and networking events to help you start and scale your business faster.

So, if you’re looking to launch or grow your business in the UAE, contact us today at www.dtec.ae/contact/