The Berkus method assigns a value to each of five risk-reducing milestones a pre-revenue company has reached, with a fixed maximum for each, and adds them up.
9 min read · Level 3
I like Berkus less as a valuation and more as a map of what has not yet been proved. The elements with the lowest values are usually exactly the questions a diligence process should focus on, and the ones a founder should be working on next.
The Berkus method values a pre-revenue company by asking which major risks it has already reduced. Each of five elements can add up to a set maximum; a commonly used cap is 500,000 each.
Element Risk it reduces Up to Sound idea (basic value) product risk 500,000 Prototype technology risk 500,000 Quality management team execution risk 500,000 Strategic relationships market risk 500,000 Product rollout or early sales production risk 500,000
A company is judged on each element:
Sound idea 400,000 Working prototype 300,000 Strong team 450,000 Strategic relationships 100,000 Early rollout 150,000 Pre-money 1,400,000
The maximum under these caps is 2,500,000. The caps are meant to be adjusted to local markets and periods; the structure matters more than the specific amounts.
Because it ties valuation to specific evidence of progress, rather than to projections. A company with an idea and a slide deck cannot reach a high value, however persuasive its forecast.
It also makes clear what the company must do to become more valuable: reduce the risks that are still unaddressed.
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Six months later, the same company.
Element Before After Sound idea 400,000 400,000 Prototype 300,000 450,000 (working product in use) Team 450,000 450,000 Strategic relationships 100,000 350,000 (signed distribution partner) Rollout 150,000 300,000 (first paying pilots) Pre-money 1,400,000 1,950,000
The increase of 550,000 is attached to three specific pieces of evidence, which is exactly what makes it easier to defend or challenge.
Applying the method to companies that already have meaningful revenue, where revenue-based methods are more informative, or keeping outdated caps that no longer reflect the local market.
Use Berkus mainly where there is little or no revenue to value.
Adjust the maximum per element to reflect current typical valuations.
Assign a value only for risks the company has demonstrably reduced.
Compare the total with the asking price and with other methods.
When valuing a pre-revenue company where progress on specific risks is the main evidence available.
Do not use it for companies with established revenue, and do not rely on it alone for a final price.
Dave Berkus, who described the method, has written that the maximum values per element should be adjusted for changes in typical pre-revenue valuations over time and between markets, rather than treated as fixed amounts.
The structure of the method lasts; the specific amounts should not be copied from old examples.
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