No revenue? No Problem!

By Abbas Fazalbhoy

When valuing a business, the past is often a good indicator of the future. But, how do we value a business that has no past? One way would be to predict the future based on projected cash flows and assess what its value is today. But for a start-up business with little or no cashflow, that can be extremely challenging and one guess is as good as the next.

Then there is The Berkus Method. The method is especially unique because it uses non-revenue factors rather than projected cash flows to value a company. Although Angels usually tweak the method to align it with their investment strategy, the central idea is common – 5 to 6 qualitative factors are selected and each is allocated a dollar value based on its underlying opportunity. These include –

  • How attractive is the idea? – The Core Value
  • What is the quality of the Management in place? – Execution Risk
  • What are the Strategic Alliances and Barriers to Entry? – Market Risk
  • Is the Prototype Completed? – Competitive Technology risk
  • Have there been Product Sales? – Production risk
  • The bargaining power of customers
  • The threat of the entrants
  • The bargaining power of suppliers
  • The threat of substitute products or services
  • The intensity of competitive rivalry

Remarkably, the Berkus Method sets a premium on Management and recognizes and monetizes the risk of execution, while Porter’s Five Forces emphasises the product and competitive landscape instead. Is it then fair to say that the jockey is as important as the horse? Are we investing in an idea or in the person who can execute it the best? Is the founder of the company the best leader in every stage of the company – from start-up to maturity and eventual decline?


Abbas Fazalbhoy is currently pursuing his MBA at McMaster University majoring in Strategic Business Valuation. He has held several management positions in the IT arena and has worked closely with software development. Abbas currently works as Business Analyst at the Altitude Accelerator.

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