How to Value a startup with no revenue

01-December-2020 by Virtue Ventures

When 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 this article.

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 following.

Founding Team

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 Businesses

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

Berkus method

This method assigns a number, a financial valuation to each of 5 critical major elements of risk faced by all young companies.

Each 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.

To 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 company (0-20%)
> Product / Technology (0-15%)
> Competitive Environment (0-10%)
> Channel 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.
Terminal 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 price-to-earnings ratio.

Risk Factor Summation Method

This 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:

> Management

> Stage of the business

> Financial risk

> Manufacturing risk

> Product / Technology risk

> Sales and marketing risk

> Competition risk

> Legislation/ political risk

> Legal risk

> Reputation risk

Book Value Method (Asset-based Valuation)

When 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 depreciation.

> 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 valuation.

Cost-to-duplicate method of valuation

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 pre-revenue startup.

In nutshell:

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.