Startup Valuation: Why Transparent Methods Beat Black Boxes

When I talk with founders about valuation, the same question comes up: "Which formula should I use?" My answer is usually: the formula matters less than whether you can show your work. Scorecard, Berkus and the VC method are useful heuristics for early-stage companies. They are not prescribed accounting formulas under IFRS/HKFRS or IVS. If you treat them as black boxes, you invite disputes. If you treat them as structured, disclosed reasoning, they earn trust.

Three heuristics, three sets of assumptions

Each method depends on assumptions about risk, progress, financing and exit value. None is a required measurement standard.

• Scorecard method: start with a benchmark valuation for comparable companies, then adjust using weighted factors such as team, market, product and competition. The weights and the benchmark must be disclosed and supported. Otherwise the arithmetic can hide subjective judgments.
• Berkus method: assign value to specified de-risking milestones—commonly team, idea, prototype, strategic relationships and rollout—then sum the assigned amounts. A report should identify its version, the milestone evidence, and any caps or currency assumptions. There is no single universal Berkus formula.
• VC method: estimate an exit value, apply an investor's target return or discount to derive a post-money value, then subtract the new investment to get a pre-money value. Exit assumptions and return targets drive the result. Sensitivity analysis is essential.

These descriptions are conceptual. They help you organise a conversation, not replace professional judgment.

What IFRS 13 actually asks for

IFRS 13 anchors fair value to a market-participant measurement. It sets out a three-level input hierarchy: active-market quoted prices are highest priority; unobservable inputs are lowest. A measurement is classified at the lowest level of any input significant to the whole measurement. For Level 3 measurements, disclosure is substantive: valuation techniques and inputs, quantitative information about significant unobservable inputs, and—for recurring Level 3 measurements—sensitivity narratives and relationships among significant inputs.

That is why transparency is not optional. It is part of the measurement discipline.

Transparent calculation is not objective measurement

A formula makes the path from inputs to result inspectable. It does not remove judgment. You still choose inputs, calibrate them to market evidence, and decide whether the method reflects the relevant unit of account and market-participant assumptions. A spreadsheet can be precise and still be wrong.

Use multiple techniques when appropriate, and explain reconciliation. IFRS 13's illustrative material says a single technique may be suitable in some cases and multiple techniques in others. For a startup, show how method outputs differ and explain the adopted conclusion rather than presenting a black-box point estimate.

Don't equate financing price with fair value

A headline equity price from a venture round is not automatically fair value. Financing terms, preferences and other instrument rights can affect how that price relates to the value of the specific interest being measured. The available sources do not provide a startup-specific IFRS rule or numerical adjustment. So analyse before you equate.

What I'd do next

• Pick your method, then disclose the benchmark, weights, milestones, exit assumptions and return targets.
• Run sensitivity analysis on the drivers that matter most.
• Use more than one method when the facts warrant it, and reconcile the outputs.
• Check current IVS edition, effective dates and Hong Kong adoption details against primary IVS/HKICPA materials before you publish.

For a deeper walkthrough, see Startup Valuation: A Comprehensive Guide to Valuing Fast-Growing Pre-Revenue Companies and the companion resource at startup-valuation.simonmak.com. For the IFRS 13 text, see IFRS 13 illustrative examples.