Risk Factor Summation Method Explained

The Risk Factor Summation method (RFS) is a rough pre-money valuation method for early-stage startups.

The RFS-method uses a base-value of a comparable startup for the valuation of your company. This base-value is then adjusted for 12 standard risk factors. This means you compare your startup to other startups and assess whether you have higher or lower risk.

How does it work?

1. You start with an average valuation for your company based on similar companies in your area and region. Plan quite a bit of time for this step. Finding the relevant data of a comparable company can take some time!
2. Then, you compare the different risk factors for you own startup on a range from very low to very high.
3. Lower risks increase the valuation for your company while higher risks decrease the valuation.
4. To improve your valuation, you can try to work on your risks and develop plans how to cover or reduce them..

On our key2investors platform you can find an interactive tool that lets you calculate the valuation of your startup with the risk factor summation method.
 
 

Best practice recommendations

• The RFS method is used mostly for pre-revenue, pre-money startups.
• Many investors use more than one valuation method for establishing a valuation range for startups.
• Challenge this valuation with the Venture Capital method, the Transaction Multiples Method and the Score-Card-Method (SCM). All these valuation methods are explained in detail on the key2investors platform.