Digital twins is a rapidly emerging space and there are several start-ups working to provide novel solutions. In this article, we’ve looked at a method of company valuation. Berkus start-up valuation is a method developed by the American venture capitalist and angel investor, Dave Berkus in the mid 1990’s. The Berkus method was designed to provide an estimate of the potential valuation of a start-up by assigning a calculated monetary value to various key success and risk factors possessed by a company. These factors have been mentioned below:
Sound Idea: This parameter represents the basic value of the product(s) / service(s) offered by a company.
Prototype: This parameter evaluates the technology success / risk factors associated with the product(s) / service(s) offered by a company.
Quality Management: This parameter takes into consideration the quality of the management team of a company in order to evaluate the execution risks associated with the team.
Strategic Relationships: This parameter represents the strategic alliances, partners, or a burgeoning customer base in order to evaluate the marketing risks of a start-up.
Company / Product Sales: This parameter takes into consideration the revenue and the profitability generated by a company.
In its original form, the Berkus method assigns a value, in the range of USD 0 to USD 500,000 to each of the aforementioned parameters, leading to a theoretical maximum pre-money valuation of USD 2.5 million. However, Dave Berkus stated that The original matrix is too restrictive, and should be a suggestion rather than a rigid form. Therefore, we have modified the framework. In addition, he suggests that the user of the method should list risks that are most important to the target company and investor, as well as assign maximum values to each firm as appropriate to the industry. It is important to mention that we have primarily used this model to estimate the worth of any start-up from an angel investor’s perspective. Based on the above statements, Berkus start-up valuation presented in this chapter has been adjusted in order to achieve projections that are in line with digital twins domain.
How did we modify the Berkus Start-up Valuation Method to value Start-ups Engaged in Digital Twins Domain?
As a starting point, relevant parameters related to digital twins that are in line with the key parameters of Berkus startup valuation analysis were identified. The identified parameters include: [A] Sound Idea (area(s) of application, type of end user(s)), [B] Prototype (technology used and type of twin(s)), [C] Management Experience (the combined experience of CXO level individuals of the firms) and [D] Strategic Relationships (partnership strength and social media presence of the company).
The start-ups were ranked on the basis of above parameters by calculating the sum of the weights and allotted scores for respective sub-parameters. After the calculation, the scores were normalized in order to analyze how a particular company stands relative to other start-ups.
In order to accurately estimate the maximum valuation that could be attained by such players, we gathered the revenue information for players engaged in digital twin domain that didn’t fulfill the inclusion criteria for this analysis. To further solidify our estimate for the maximum possible valuation of such start-ups, the team gathered information on seed funding rounds obtained by players of the same peer group.
After calculating the maximum possible valuation, the amount was equally divided amongst the four Berkus start-up valuation parameters considered for the analysis.
In order to calculate the final valuation of a start-up, the valuation calculated for each of the Berkus parameters were added using the formula written below:
Vfinal = (W1*Vmax)+(W2*Vmax)+(W3*Vmax)+(W4*Vmax)
Where Vfinal is the final calculated valuation of a startup for a particular player, W1, W2, W3 and W4 are the weights of the Berkus parameters and Vmax is the maximum valuation that can be attained by a player for a specific parameter.
Valuation of Players as Calculated using Berkus Start-up Valuation Analysis
After using the above steps, we obtained estimated valuation for start-ups (considered for this analysis) engaged in the production of digital twins in healthcare domain. The figure below presents the overview of the results obtained using this method.
As can be observed in the figure, Company 1 (Anatoscope) was ranked relatively highest, with a valuation of USD 17.41 million. Currently, the company claims to offer whole body digital twin intended to serve dental and orthopedic disorders, focused on personalized treatment. This start-up was found to have a strong management team, having CXO level individuals with high level of experience and connections in the domain.
In addition, the team performed relative parameter-wise benchmarking of companies considered for Berkus Start-up Valuation Analysis. Below, I have pasted the figure that depicts relative benchmarking of these companies.
Berkus start-up valuation is a straightforward and flexible valuation method for startups. Here in, I demonstrated the use of Berkus method, as employed by our team, to valuate start-ups engaged in the production of digital twins in the healthcare domain. However, this method can be used to valuate start-ups engaged in any technological domain and can be employed by angel investors and startup entrepreneurs to evaluate startups in the earlier stages.
It is worth noting that Berkus method has critics as well. Some say that the method is quite simplistic and does not take into consideration the unique risks and challenges faced by the new companies. However, despite its critics, the Berkus method remains a popular valuation tool for startups.
Gaurav Raj Bangarh is a business research analyst and competitive intelligence professional. He is highly skilled at generating useful insights from unstructured / structured datasets. As a senior analyst at Roots Analysis, Gaurav has assisted several clients across multiple industry verticals within the healthcare domain. These verticals include, medical devices / technologies, digital healthcare services and various drugs / disease indications.
Gaurav holds a B. Tech degree in Biotechnology from Lovely Professional University. In addition to working on market research and pharmaceutical business analysis, he has hands-on laboratory experience and has worked at esteemed research institutes of India, such as CSIR-CFTRI, Mysore. To date, he has contributed to over seven full length market research projects.