How can the Berkus valuation method be customized for different industries?

Did you know that startup failure rates rose by 60% in 2024, mainly due to investor enthusiasm leading to overvaluation? The Berkus valuation method was designed specifically to combat overvaluation trends. However, this method was developed in the 1990s and last updated nearly a decade ago. Additionally, its one-size-fits-all approach may not adequately capture the diverse dynamics of different sectors.

Hence, in this article, we will try to improve upon the Berkus valuation method by adjusting for the passage of time and customizing the method to provide better results in four key sectors.

What is the Berkus valuation method?

In the Berkus valuation method, investors can add up to $500,000 for a startup’s progress toward five key milestones which are as follows:

Milestones	Maximum increase in company valuation	Reasoning
Sound idea	$500,000	Strong concepts form the foundation of viable businesses.
Prototype	$500,000	If a startup has developed a prototype, it has shown that the product is technologically viable in the current environment.
Quality management team	$500,000	If a startup has knowledgeable and experienced founders, executing the idea, improving upon the prototype, and scaling operations carry less risk.
Strategic relationships	$500,000	If a startup has reliable partnerships, it will enjoy some degree of stability in supply and distribution which protects it from market and competition-related risks.
Product rollout or sales	$500,000	If a startup has found customers for its product, it has made some progress towards proving its commercial viability.
Maximum valuation of pre-revenue startup	$2,500,000

Note: Berkus valuation method is applicable only to startups that haven’t been generating revenue for any significant amount of time.

Any startup that regularly generates revenue could be valued using the relevant valuation multiples and hence, there would be no need to cap its value through the Berkus valuation method.

How to customize the Berkus valuation method for different industries?

The Berkus method was last updated in 2016 when the median pre-money seed valuations for US startups was $5 million. This figure rose to $12 million in 2024. Hence, we must adjust the maximum achievable valuation under the Berkus valuation method, which currently stands at $2.5 million, in the following manner.

Industry	Median pre-money seed stage valuation in 2016 (A)	Median pre-money seed stage valuation in 2024 (B)	Growth (C = (B÷A) - 1)	Adjusted maximum attainable valuation (D = (C+1) × $2.5 million)
Healthcare	$6.96 million	$12.00 million	72.41%	$4,310,344.83
Software-as-a-service	$5.00 million	$13.50 million	170.00%	$6,750,000.00
Fintech	$5.00 million	$15.30 million	206.00%	$7,650,000.00
Climate tech	$4.00 million	$13.00 million	225.00%	$8,125,000.00

Now that we have estimated the maximum attainable valuation for these sectors, we will turn our attention to the milestones and their weights. We will examine the significance of each milestone, identify additional key milestones for each sector, and reallocate weights based on their varying importance across the mentioned sectors.

Healthcare

It is unreasonable to judge a healthcare startup by its prototype or its product rollout and sales since healthcare products have long research and development (R&D) cycles and significant regulatory hurdles to clear.

In contrast, the importance of a quality management team is higher in this sector since the experience and qualifications of the founders play a key role in the success of the research. Additionally, a healthcare startup at this stage may need partnerships with hospitals and universities but commercial partnerships are not necessary.

Hence, we propose:

• Removing the slots for ‘prototype’ and ‘product rollout or sales’
• Increasing the weightage for the ‘quality management team’ slot
• Reducing the weightage for the ‘Strategic relationships’ slot

Let us summarize our adjustments to the Berkus valuation method for the healthcare sector.

Milestones	Weight	Addition to company valuation up to
Sound idea	⅓ ≈ 0.3333	$1,436,781.61
Quality management team	1-⅓-¼ ≈ 0.4167	$1,795,977.01
Strategic relationships	¼ = 0.25	$1,077,586.21
	Maximum valuation achievable	$4,310,344.83

Software-as-a-service (SaaS)

Since building a minimum viable product is not a huge challenge for SaaS startups and can be achieved with low code with today’s software development framework, we propose reducing the weightage on the prototype slot.

Secondly, we must increase the weightage on strategic relationships as the right partnerships and early collaborations can significantly accelerate growth by leveraging network effects and the demand for complementary products.

Similarly, the weightage for product rollout or sales must be increased since evidence of product-market fit is extremely important with new and innovative SaaS products.

Thus, our proposals for milestone weights are as follows:

• Reduce the weight assigned to the ‘prototype’ slot
• Increase the weight on the ‘strategic relationships’ slot
• Increase the weight on the ‘product rollout or sales’ slot

Our adjustments to the Berkus valuation method for SaaS startups are summarized in the following table.

Milestones	Weight	Addition to company valuation up to
Sound idea	0.2	$1,350,000
Prototype	0.1	$675,000
Quality management team	0.2	$1,350,000
Strategic relationships	0.25	$1,687,500
Product rollout or sales	0.25	$1,687,500
	Maximum valuation achievable	$6,750,000.00

Fintech

Just like SaaS startups, fintech startups can develop a minimum viable product (MVP) using minimal coding on the back of various APIs and need not build a full-fledged platform at the seed stage.

However, the quality of the management team, or rather its regulatory expertise, has a major impact on how smoothly the startup’s strategy is executed, given the sensitivity to fraud, cybersecurity, and regulations relating to KYC and anti-money laundering.

The scalability of fintech startups gets a major boost if fintech forms the right partnerships with payment processors, banks, and other fintech startups.

With these factors in mind, for fintech startup valuation, we propose the following adjustments:

• Reducing the weightage on prototypes
• Modifying the ‘quality of management team’ slot to‘ regulatory expertise of management team’ and increasing its weightage
• Increasing the weightage on ‘strategic relationships’

Now, let us summarize our adjustments to the Berkus valuation method.

Milestones	Weight	Addition to company valuation up to
Sound idea	0.2	$1,530,000
Prototype	0.1	$765,000
Regulatory expertise of the management team	0.25	$1,912,500
Strategic relationships	0.25	$1,912,500
Product rollout or sales	0.2	$1,530,000
	Maximum valuation achievable	$7,650,000.00

Climate tech

Just like healthcare startups, climate tech startups require much more time to build a minimum viable product (MVP) than other industries. Instead, more importance should be given to validation through proof-of-concept experiments.

Additionally, the management team should carry more weight since in-depth knowledge of regulations and climate tech is vital to building a commercially viable product in this sector.

Since partnerships with governments and regulatory bodies can accelerate product adoption, we must increase the weightage on this slot.

Finally, given the highly innovative nature of climate tech, we propose replacing the product rollout or sales slot with an infrastructure readiness slot to reflect the industry’s reliance on supportive infrastructure for growth.

Our proposal can be summarized as:

• Alter the ‘prototype’ slot to the ‘proof-of-concept’ slot
• Increase the weightage assigned to the ‘quality of management team’ slot
• Increase the weightage assigned to the ‘strategic relationships’ slot
• Alter the ‘product rollout or sales’ slot to the ‘infrastructure readiness’ slot

The Berkus valuation method for climate tech would look like this after incorporating the abovementioned proposals.

Milestones	Weight	Addition to company valuation up to
Sound idea	(1-¼-¼)÷3≈0.1667	$1,354,167
Proof-of-concept	(1-¼-¼)÷3≈0.1667	$1,354,167
Quality of management team	¼ = 0.25	$2,031,250
Strategic relationships	¼ = 0.25	$2,031,250
Infrastructure readiness	(1-¼-¼)÷3≈0.1667	$1,354,167
	Maximum valuation achievable	$8,125,000

Eqvista – Precise valuations for prudent investment decisions!

The Berkus valuation method’s strength lies in preventing the overvaluation of early-stage startups. However, its one-size-fits-all approach overlooks key factors that influence a startup’s success.

If you develop an in-depth understanding of what’s crucial for an early-stage startup from a certain industry, you too could make adjustments to the Berkus valuation method to gain meaningful valuation insights.

At Eqvista, we have assembled a team of financial experts and shrewd researchers which enables us to demystify valuation trends across industries and lifecycle stages and effectively aid private equity investment decision-making. Contact us to learn more about our services!