Thoughts on startups by investors that
fund them & entrepreneurs that run them

Valuations 101: The Risk Factor Summation Method

The Risk Factor Summation Method is the fifth methodology for estimating the pre-money valuation of pre-revenue companies we have described in recent posts. Readers may have noted that both the Scorecard Method and the Dave Berkus Method considered a narrow set of important criteria for investment in arriving at a pre-money valuation.

The Risk Factor Summation Method, described by the Ohio TechAngels, considers a much broader set of factors in determining the pre-money valuation of pre-revenue companies. This method may be less useful as a stand-alone valuation method for investors, but it is my opinion that this method should be one of several methods used by early-stage investors to establish pre-money valuation because it forces investors to consider important exogenous factors.The Ohio TechAngels describe the method as follows: “Reflecting the premise that the higher the number of risk factors, then the higher the overall risk, this method forces investors to think about the various types of risks which a particular venture must manage in order to achieve a lucrative exit. Of course, the largest is always ‘Management Risk’ which demands the most consideration and investors feel is the most overarching risk in any venture. While this method certainly considers the level of management risk it also prompts the user to assess other risk types,” including:

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

Each risk (above) is assessed, as follows:

  • +2   very positive for growing the company and executing a wonderful exit
  • +1   positive
  • 0     neutral
  • -1    negative for growing the company and executing a wonderful exit
  • -2   very negative

The average pre-money valuation of pre-revenue companies in your region is then adjusted positively by $250,000 for every +1 (+$500K for a +2) and negatively by $250,000 for every -1 (-$500K for a -2). For more information on determining the average valuations in your area, see the Scorecard Method.

As an example, assume the average pre-money valuation of pre-revenue companies in your area is $2.0 million. If your judgment of the twelve factors above has five neutral assessments (five zeros), five +1’s, one -1 and one -2 (a net of two +1’s), then add $500,000 to the average valuation of $2.0 million, arriving at a $2.5 million pre-money valuation.

Best practice for angels investing in pre-revenue ventures is to use multiple methods for establishing the pre-money valuation for seed/startup companies. The Risk Factor Summation Method is useful as one such method. We will wrap up this series with a post summarizing the multiple valuation methods for establishing the pre-money valuation of seed and startup companies in an upcoming post.

How does your venture stack up? Get free investor-grade startup feedback in just 15 minutes >>

Written by Bill Payne

user Bill Payne Angel Investor ,
Frontier Angel Fund

Bill Payne has been actively involved in angel investing since 1980. He has funded over 50 companies and mentored over 100. He is a founding member of four angel organizations: Aztec Venture Network, Tech Coast Angels, Vegas Valley Angels, and Frontier Angel Fund.

prev next

You might also be interested in

How to Give Women the Wings of an Angel

Canada has not tapped its female angel investor potential – yet.

The female angel investor conversation has been discussed inside and out. From TechCrunch, BetaKit to the Financial Post, there have been more than a few arguments made about the lack of female representation in Canada’s early-stage investment community and the benefits of tapping into this financial resource.

For example,

Read more >

Challenges and Rewards for Angel Investors

One of the most common questions we get is: What are the biggest challenges and rewards of angel investing? High net worth individuals become angel investors for a number of reasons, but the opportunity to work with entrepreneurs and provide guidance to founders is typically high on the list. In this video, angel investor Chenoa Farnsworth explains why, interestingly, both the biggest

Read more >

Why Does Startup Pricing Vary by Location?

Entrepreneurs seem genuinely surprised to find that investors in Peoria or Little Rock are not willing to invest in startup companies at Silicon Valley prices.  After all, they just read in TechCrunch that investors funded a company similar to theirs at an $8 million pre-money valuation!

The valuation of startup companies shouldn’t be impacted by location, should they?  Guess again! 

Read more >

Where would I go to invest in startups or emerging companies?

The first question you need to ask is “What country are you in?” and the second is “Are you an Accredited Investor by that country’s standards?”

If we’re talking about the US and you are NOT at the Accredited level ($1 million in investable assets, or $200,000 annual income), then for the moment you are actually not allowed to invest in privately held startups

Read more >

Crowdfunding: KickStarter, Indiegogo, AngelList, Gust: How to choose?

First, it’s important to understand that the four platforms you list fall into two very distinct groups.

Kickstarter and IndieGoGo are project-based crowdfunding platforms through which anyone can contribute money, either as a donation or with the promise that they will receive a tangible ‘reward’ of some kind if the project is successful.

Gust and AngelList are equity-based platforms, used by Accredited Investors  to facilitate the investment of money for an ownership interest in

Read more >


6 thoughts on “Valuations 101: The Risk Factor Summation Method”

  1. Hal Spice says:


    I read your post and downloaded a PDF of your paper. Invaluable! Great insight on valuations. Thanks for making your ideas public.

  2. Ross Clurman says:

    Great post and very helpful! In fact, we used it to do our valuation. I think it would be very helpful if you defined each of the risk types, so we know, roughly, how to evaluate our business for each of those risk types.

  3. roberto pantoja says:

    Amazing method, but I´ll have too adapt to my own reality. I´m from Brazil and the numbers are very different, 250-500k it´s just too much…