Swiss Startup Valuation Methods: From Seed Stage to Series A

Berkus Method: Building Value from Zero

The Berkus Method assigns financial value to five aspects of a pre-revenue startup. Each aspect reduces a specific risk. The method starts at zero and builds upward, rather than adjusting downward from a market comparable.

The five aspects and their Swiss context:

1. Sound Idea: The business concept addresses a real problem in a large market. A niche solution for only the Swiss market has limited value. A scalable idea targeting global markets has high value.
   
2. Prototype: A working proof-of-concept exists. For software companies, this proof might be a minimum viable product (MVP). For hardware startups, this proof might be a functional model. The prototype demonstrates that the idea can work in practice.
   
3. Quality Management Team: The founders have relevant experience and expertise. A team with prior startup success, deep industry knowledge, or elite technical credentials from ETH or EPFL scores highly. An inexperienced team scores lower.
   
4. Strategic Relationships: The startup has secured partnerships or customer contacts. A pilot project agreement with a major Swiss corporation like Novartis, Nestlé, or UBS demonstrates value. These relationships reduce market access risk.
   
5. Product Rollout: Evidence of customer demand exists. For pre-revenue companies, this evidence might include a waitlist of potential customers or signed Letters of Intent.
   

The standard method assigns up to USD 500’000 per aspect. For Swiss startups, a direct conversion to CHF 0 to CHF 500’000 per aspect is commonly accepted. This conversion leads to a maximum pre-money valuation of CHF 2.5 million.

When to use this method: Pre-seed stage, when the company is pre-revenue and often pre-prototype. The Berkus Method provides a starting point for negotiation.

Key limitation: The CHF 500’000 maximum per category is a general rule that is not always followed. It is not tied to specific market data. The method is subjective and depends heavily on judgment.

Risk Factor Summation Method: Adjusting for Specific Risks

The Risk Factor Summation Method starts with a base valuation for a comparable pre-revenue startup in the region. It then adjusts this base valuation up or down based on specific risk factors.

The process:

1. Determine a base valuation (using regional data or the Scorecard Method described below).
2. Assess each risk factor on a scale (for example, from very negative to very positive).
3. Assign a monetary adjustment for each factor.
4. Count up the adjustments and add them to or subtract them from the base valuation.

Seven critical risk categories for Swiss startups:

• Management Team: The skill, completeness, and experience of the founding team. A team with gaps in critical roles (no CFO, no technical co-founder) receives a negative adjustment. A complete, experienced team receives a positive adjustment.
  
• Regulatory Risk: Checkpoints from regulatory bodies like FINMA for fintech companies or Swissmedic for medical devices. A clear regulatory pathway reduces risk. An uncertain approval process increases risk.
  
• Intellectual Property: The strength and defensibility of patents, especially for ETH and EPFL spin-offs. Strong, filed patents reduce risk. Weak or challenged IP increases risk.
  
• Market and Competition Risk: The size of the relevant market and the strength of competitors. A large, growing market with few dominant players is positive. A crowded, highly competitive market is negative.
  
• Technology Risk: Whether the technology is proven and defensible. A technology based on published research with successful proof-of-concept is lower risk. Unproven technology requiring significant R&D is higher risk.
  
• Sales and Marketing Risk: Whether the team can acquire customers at a reasonable cost. A clear path to get customers is positive. An unclear way to get customers is negative.
  
• Funding Risk: The risk of being unable to raise the next financing round. Strong investor interest and a clear path to profitability reduce this risk. Dependence on a single funding source increases it.
  

The adjustment ranges vary by investor and deal. Regulatory and IP risk often receive the highest weighting in deep tech and medtech deals.

When to use this method: Seed stage, when enough information exists to assess specific risks but revenue data is still limited.

Scorecard Method: Comparing to Market Averages

The Scorecard Method (also called the Bill Payne Method) compares the target startup to an average of other recently funded startups in the same geography and sector. It is a relative valuation approach.

The process:

1. Determine the average pre-money valuation of similar deals in Switzerland. This average becomes the base valuation. For example, if seed-stage SaaS companies in Switzerland recently raised at CHF 2.5 million pre-money, that figure is the starting point.
   
2. Weight key factors based on their importance to success. The weights must add up to 100%.
   
3. Compare the target startup to the average for each factor. If the startup is stronger than average, assign a percentage above 100%. If weaker, assign a percentage below 100%.
   
4. Calculate a weighted-average factor and multiply it by the base valuation.
   

Common comparison factors:

• Strength of the Team (often weighted 25-30%)
• Size of Opportunity (often weighted 20-25%)
• Product or Technology (often weighted 10-15%)
• Competitive Environment (often weighted 5-10%)
• Marketing and Sales Channels (often weighted 5-10%)
• Need for Additional Investment (often weighted 5-10%)

When to use this method: Pre-seed and seed stage. The Scorecard Method is more data-driven than the Berkus Method because it anchors to market averages. Angel groups like SICTIC favor this approach because it grounds the discussion in comparable deals.

Cost-to-Duplicate Method: Defining a Floor

The Cost-to-Duplicate Method calculates the costs required to build the startup’s assets from scratch. This calculation does not point to the company’s value. It establishes a floor below which the valuation should not fall.

Costs included:

• Developer and engineer salaries at market rates
• Hardware and infrastructure costs
• Patent filing and legal expenses
• Tangible assets and prototypes

Why this calculation shows a floor: An investor could theoretically replicate the company by paying this amount. The actual value should be higher to account for intangible assets (like team cohesion, market traction, brand recognition, and time-to-market advantage).

Swiss cantonal cost differences: The cost to hire three engineers in Zurich or Geneva is substantially higher than in Ticino or Valais. A senior software engineer in Zurich may need a salary of CHF 130’000 or more. A similar role in a lower-cost canton might be covered for CHF 110’000. For a team of five, this difference directly impacts the Cost-to-Duplicate calculation. A Zurich-based startup will have a higher cost floor than an identical startup in a lower-cost canton.

When to use this method: As a supporting calculation alongside other methods. It is particularly useful for hardware companies or deep tech startups with significant R&D expenses.

VC Method: Working Backward from Exit

The VC Method (Venture Capital Method) works backward from a potential future exit to determine the present-day valuation an investor can pay while achieving their required return on investment.

The basic formula:

1. Estimate Exit Value (Terminal Value): Multiply projected revenue in the exit year by an industry-standard exit multiple. For example, if a company projects CHF 20 million in revenue in year seven and similar companies exit at 5x revenue, the estimated exit value is CHF 100 million.
   
2. Calculate Post-Money Valuation: Divide the exit value by the required ROI multiple. If an investor needs a 20x return, the calculation is CHF 100 million ÷ 20 = CHF 5 million post-money valuation.
   
3. Calculate Pre-Money Valuation: Subtract the investment amount from the post-money valuation. If the investor commits CHF 1 million, the pre-money valuation is CHF 5 million – CHF 1 million = CHF 4 million.
   

Typical required ROI multiples: Venture capitalists must account for the high failure rate in their portfolio. Realistic ROI targets vary by stage:

• Seed Stage: 20x to 40x
• Series A: 10x to 15x
• Series B and later: 5x to 7x

When this method becomes viable: Once a startup has a predictable business model and initial traction. This traction might be revenue or strong user growth. Revenue projections for an exit five to seven years out must be at least plausible. The VC Method typically becomes useful at Series A and later rounds.

Discounted Cash Flow (DCF): Why It Fails for Startups

The DCF method is appropriate for mature, stable companies with several years of positive, predictable cash flows. It works well for valuing a profitable SME being acquired. It does not work for early-stage startups.

Why DCF fails:

1. Negative and uncertain cash flows: Most startups burn cash for years before achieving profitability.
   
2. Unreliable projections: Forecasting revenue and costs five to ten years out for an early-stage company is speculation. Small changes in assumptions create massive changes in the calculated valuation.
   
3. Impractically high discount rates: The discount rate must account for the enormous risk of failure. For early-stage startups, this rate can exceed 50% to 100%. At these rates, the present value of future cash flows becomes negligible. The model produces meaningless results.
   

A founder presenting a DCF model for a pre-revenue startup signals a fundamental misunderstanding of startup finance. Investors view this type of presentation as a red flag.