After the initial value, the investor then applies the risk factor summation

Risk Factor Summation Approach

Here, the investor focuses on the quantitative risks associated with the startup which may affect the ROI. An initial value of the business is first established (e.g. using one of the other methods mentioned above). Then, the investor applies a “risk factor summation” to the initial estimated value of the startup to determine its final value. These might include management risk, political risk, manufacturing risk. Here, investors are likely to arrive at different valuations based on their risk appetite and the weight they assign to each risk category