Risk factor summation is a pre-revenue valuation technique that starts from a regional baseline and adds fixed-dollar adjustments for better-or-worse risk factors.

How it works

Pick a baseline — say $2M pre-money for seed software in your metro. List factors: management strength, size of opportunity, product stage, competition, sales channel risk, funding needs, and others.

Each factor scores + (less risk than average), 0, or − (more risk). Each step might move valuation by $250K. Strong team (+), crowded market (−), working prototype (+) net to a suggested $2.25M pre-money.

The method pairs with scorecard valuation and Berkus method in angel education materials. Outputs are transparent but subjective — two reviewers rarely score identically.

Institutional rounds rarely price this way once traction metrics exist; revenue multiples and comparable deals dominate.

Why it matters

• Founders: Useful for calibrating angel conversations; do not treat the output as binding if term sheets say otherwise.
• Investors: Helpful for syndicates aligning on pre-revenue deals without a market comp — document assumptions for LP notes.

Common mistake

Presenting risk-factor summation as objective fair market value in 409A or board materials. It is a heuristic, not a market discovery process.

Related ideas

See also scorecard valuation, Berkus method, 409A valuation, and pre-money valuation.