it comes to deciding pre-revenue startup valuations, there are many elements to
consider. From the strength of the Management team and the ruthless environment
to sales, promotion and marketing risk and phase of the business, quite a few
qualitative variables can affect the pre-revenue valuations of startup. And
even after all this information has been integrated, the final estimate is
still an estimate.
In the early stages, a startup’s
fair value is likely somewhere in the range of: lower than what a founder hopes
it to be, and higher than what an investor is hoping to pay for a portion of the equity. When revenue is not in play, there are many other factors that become
more important to calculate a fair startup valuation, and many of these factors
can be quite subjective.
Now, what are these factors? When
it comes to a pre-revenue startup valuation, what do investors look for? How do
you secure an investment for your startup when you haven’t yet produced any
sales? Answers to all these questions are explained in the following part of
Important factors for pre-revenue startup valuation:
Let’s see at the key factor worth considering during
Pre-revenue startup valuations.
Traction is a Proof of Concept:
In case you are thinking about
how to value a startup company with no revenue, one of the main indicators is
traction. You can get the genuine story of the business by looking at
For a pre-revenue startup,
probably the best indicator of achievement is the strength and experience of
the founding team. How strong is your founding team? Here are a few attributes of
a valuable team:
How Investors Value Pre-Revenue
Investigating your company to
complete a pre-revenue valuation by yourself can seem like an overwhelming
task. You can utilize the methods of experienced investors to get an estimate
of the value of your pre-revenue company. Do your best to get yourself as
familiar with these startup valuation methods, as it'll assist you with
understanding better how to assess your Company. There are 6 popular methods
investors can use for the pre-revenue companies to find the list below. And the
most popular method is “Berkus Method”.
List of Methods for Valuation of a startup without revenue
method assigns a number, a financial valuation to each of 5 critical major
elements of risk faced by all young companies.
aspect is given a rating up to $500,000, which means the highest possible
valuation is $2.0 million.
The Berkus Method is a simple estimation, often used for
tech startups. It is a useful way to measure the value, but as it doesn’t take
the market into account, it may not offer the scope some people desire.
Scorecard Valuation Method
This is one of the more popular
startup valuation methods used by angel investors. It’s also known as the Bill
Payne valuation method, and it works by comparing the startup to others that
are already funded.
begin, one needs to determine the average valuation for pre-revenue startups in
that market space. After that, you can determine how the startup stacks up
against others in the same region by assessing the below-mentioned factors:
> Strength of
Management Team (0-35%)
> Size of the
> Product /
Partners / Sales Channels (0-10%)
> Need for an additional Investment (0-10%)
Venture Capital (“VC”) Method.
The VC method is a two-step
process that requires several pre-money valuation formulas.
> First, we need
to calculate the terminal value of the business in the harvest year.
> Secondly, we
need to track backward with the expected ROI and investment amount to calculate
the pre-money valuation.
value is the expected value of the startup on a specific date in the future,
while the harvest year is the year that an investor will exit the startup.
Another term you’ll need to know is the Industry P/E ratio, which is the stock
Factor Summation Method
method combines features of the Scorecard Method and the Berkus Method to
provide a more-detailed estimation focused on the risks involved with an
investment. It takes the following risks into consideration:
> Stage of the business
> Financial risk
> Product /
> Sales and
> Competition risk
> Legal risk
> Reputation risk
Value Method (Asset-based Valuation)
we are looking to know how to value a startup company with no revenue, the book
value method may be the easiest method to use, as it offers a solid assessment
of the real value of the startup.
This method entails a below mentioned financial intricacies:
> The initial
costs of the startup’s assets are counterbalanced by impairment costs and
> The total value
of physical assets is added to balance sheet values. This also covers current
assets such as cash on hand, accounts receivables.
> Any outstanding
debts or expenses will be subtracted from the total to give you the asset-based
Cost-to-duplicate method of
In this method, you assess the
physical assets of the startup and then consider how much it would take to
duplicate the startup. No investor would invest more than the market value of
the assets, so it’s useful to know this when looking for pre-revenue investors.
For example, a tech startup could
consider the expense of developing their prototype, patent protection, and
research and development.
This method also doesn’t take the
future potential of the startup into consideration, nor does it consider
intangible assets such as brand value or current market trends.
Therefore, as it is quite an
objective approach, this is best used to get a base value estimate of your
In the end, a startup will be
worth whatever investors are willing to invest in it. As an entrepreneur, you
may not agree with every valuation your startup gets. At last, you must
remember the variables at play, and understand that No valuation is permanent.