Berkus-Inspired Impact-Only Scoreboard for Early-Stage Impact Startup Valuation

Abstract

This thesis introduces and verifies a Berkus-inspired impact-adjusted valuation scoreboard for early-stage impact startups at the pre-seed, seed and Series A rounds. The traditional way of valuing startups does not apply to early-stage startups because they usually lack financial histories and stable cash flows. Therefore, traditional methods are prone to bias. The limitations are even more pronounced for impact-oriented startups, and many of their values stem from intangible social and environmental results rather than solely from financial indicators. Therefore, this thesis builds a structured qualitative valuation system to incorporate impact assessment in a scoring and multiplier mechanism for startup valuation. The five essential attributes of the framework have been adapted from IRIS+, the Impact Management Project, the IFC Operating Principles for Impact Management, and SDG Impact Standards: What, Who, How much, Contribution and Risk. All Dimensions have equal weights and are evaluated according to a rubric. The resulting impact score is then converted into a valuation multiple of 0.70 - 1.35 and applied to a comparable market-based pre-money valuation benchmark. The research will use a combination of questionnaires for professional feedback and actual cases of start-ups. Questionnaires are being distributed to investors from angel investment, venture capital, private equity, family offices, as well as social impact investment groups to obtain feedback from investment practioners in different markets. The result supports that the system is feasible and can be implemented in early-stage impact investment environments. The second validation process will use the framework for actual cases of the three companies, including Cleantec, Shellworks and Zevero. The valuation produced by the framework is relatively close to what has been realized in the market and through fundraising. The start-up with a high impact score is relatively easy to develop, follows an incremental growth model, and is therefore more attractive to potential investors. This paper introduces and verifies a Berkus-inspired impact-adjusted valuation score card for early-stage impact startups at the pre-seed, seed and Series A rounds. The old way of valuing startups does not fit these days, and the specific contents of a company's financial statements may also lack stability; therefore, such methods are prone to bias. Such deficiencies are even more pronounced for impact-oriented startups, and many of their values stem from non-financial social and environmental results rather than solely from economic indicators. Therefore, this paper builds a structured qualitative valuation system to incorporate impact assessment in a scoring and multiplier mechanism for startup valuation. The five essential attributes of the framework have been adapted from IRIS+, the Impact Management Project, the IFC Operating Principles for Impact Management, and SDG Impact Standards: What, Who, How much, Contribution and Risk. All Dimensions have equal weights and are evaluated according to a rubric. The resulting impact score is then converted into a valuation multiple of 0.70 - 1.35 and applied to a comparable market-based pre-money valuation reference. This study will use a combination of questionnaires for professional feedback and actual cases of start-ups. Questionnaires are being distributed around the world by venture capital, private equity, angel investing and family offices, as well as social impact investment groups to obtain opinions from investment specialists in these fields. Generally speaking, based on the above data, it appears that the system is feasible and can actually be implemented at the beginning of impact oriented investment projects. Respondents know that additivity and measurement reliability are necessary for scaling up, and want to see the results of such a scaling up. The second validation process will use the above framework for actual cases of the three companies. The values produced by the framework are relatively close to what has been realized in the market and through fundraising. Generally speaking, the start-up with a high impact score is relatively easy to develop, follows an incremental growth model, and is therefore more attractive to potential investors. Based on the above, an organized impact assessment system can be constructed to support the valuation of early-stage startups. Although the framework is still in the exploratory and relatively qualitative stages, this thesis will expand on previous studies of impact investment by offering an applied and transparent approach for incorporating impact quality into early-stage valuation.