How to Value a Startup Company With No Revenue

November 26th, 2022

You will face several tricky issues at the beginning of your startup journey. A considerable one of these is how to value a startup company with no revenue. This is key as potential investors will have to go off before they are willing to put any money into the company, so accurately reflecting this is hugely important.

You must consider several things, from the management team to the marketing potential, product demand, and financial risk. While making this as accurate as possible, it is essential to remember that the best you will ever be able to do is an estimation.

Startup Valuation vs. Mature Business Valuation

Startup Valuation vs. Mature Business Valuation

Startup Valuation is the act of calculating the worth of a startup company. The methods used to do this are critical as they will affect their growth and revenue potential.

While business owners will hope for a high valuation, it is common for startup owners at this stage to hope for a lower valuation as this will promise a more significant return on investment (ROI) which is very attractive for those looking to invest in them.

While startup valuations are based on many varying factors to make as accurate an estimation as possible, mature publicly listed companies have hard facts and figures to do their valuation based on. Moreover, as they have a stream of revenue and complete financial records, the valuation is considerably easier.

Startup Valuation Considerations

Let's look at some crucial factors to consider when valuing your startup:

The Founding Team

Startup Valuation vs. Mature Business Valuation

When an investor backs a project with no revenue, they will want to ensure that the team behind it is likely to succeed; they will therefore consider several factors about your founding team.

  • Committed: An investor is unlikely to be impressed by a team of busy, part-time employees. Instead, they will want to see the team has the time and desire to work as many hours as needed and that it is their primary focus.
  • Diversity of Skills: The team must have several varying but complementary skills. A lone programmer will only be able to do so much, but if they are supported by a marketing or sales expert, the startup will be worth more.
  • Proven Experience: A team with at least a few members who have experience with successful startups will be far more interesting than a team of first-timers.

Prototypes/ Minimum Viable Product

Prototypes/ Minimum Viable Product

A physical prototype of your products can be an absolute game changer. It shows that the product works and that you truly have the means and skills to bring it to life. It also shows that you are closer to the product launch date.

Supply and Demand

If your product is a rare, patented program or design, you will likely have higher demand from investors. Unfortunately, in an over-saturated market of similar products, it can take more work to get suitable investments for the business.

New Industries and Trends

Investors are happy to pay a premium in industries with huge interest, such as gaming, AI, or similar in the tech world. However, the time is now for the best emerging ideas in the industry, as the digital age is alive and well.

“Showing proof of concept through traction is also an important consideration factor for valuation. Traction helps to build investors' confidence in the fact that your company will generate revenue in the near future. Evidence of traction includes:

  • An interested user base - Have you got sign-ups for a waiting list for your product or even letters of intent?
  • An established user base - How many people already use your product, even if they’re not paying for it yet?
  • Website traffic - what marketing metrics do you have to show there’s demand for your product?
  • MVP stickiness - can you show that users are coming back for more as opposed to constantly acquiring new users who aren’t returning?
  • Engagement data - can you show the number of referrals, potential leads and conversations you’ve had with your prospective audience?”

Anthony Rose, CEO & Co-founder, SeedLegals

How can investors value pre-revenue companies:

How can investors value pre-revenue companies:

Berkus Method

This method was developed by the investor Dave Berkus; he believes that the investor should be able to reasonably envision the company breaking the $20 million barrier within five years. This method assesses five aspects of a startup.

  • Concept: Product value versus acceptable risk
  • Quality Management: If they still need to get a quality management team, they must show imminent plans to do so.
  • Connections: Have they begun some strategic partnerships already?
  • Launch: Sales plan and the preparation for the rollout
  • Prototype: Reduces the risk of the product not working

Each aspect is then given a valuation of up to $500,000, with the highest total valuation of $2.5 million.

As you can see, it is a simple estimation commonly used for tech startups. However, it doesn't evaluate the market and has a different scope than other methods.

Venture Capital Method

Venture Capital Method

Harvard Professor Bill Sahlman popularised this method. It is a two-step method that requires several formulas.

First, you must calculate the terminal business value of the harvest year.

Terminal Value = The expected value of the startup on a specific future date.

Harvest year means the year that an investor will leave the startup.

Industry P/E Ratio= This is the stock price-to-earnings ratio. I.e., a P/E ratio of 3 means that the stock is valued at 3 x $1 in earnings.

To do so, you need the following figures.

  • Projected revenue in the harvest year
  • Projected profit margin in the harvest year
  • Industry P/E ratio

Once you have these figures, you must use the following calculation.

Terminal value = projected revenue x projected margin xP/E

Terminal Value= earnings x P/E

So a company projects $10 M revenue in 5 years, with a profit margin of 10% and an industry P/E ratio is 20.

The terminal value is = $10M * 10% * 20= $20M

Then you must work out the pre-money valuation.

Then you must work out the pre-money valuation.

For this step, you will need the: 

  • The required return on investment (ROI) 
  • The investment amount.

The calculation is as follows:

  • Pre-Money Valuation= Terminal Value /ROI - Investment Amount

For example, an investor wants an ROI of 10x on his intended investment of $1M.

The Pre-Money Valuation will be = $20M / 10 - $1M = $1M

Using this calculation, we can see that the pre-revenue startup valuation is $1M. With the investment of 1 million and the assumptions made about growth and earnings, this could mean the company will be worth $20 M in five years.

“SeedLegals data shows companies dilute a media 15% in early-stage rounds - i.e. the investors will own 15% of the business. Mathematically that's equivalent to a valuation of 5X the amount you're raising, e.g. raising £300K at a £1.5M pre-money valuation. So another way of arriving at a valuation in your first round is to figure out how much you need to raise, multiply it by 5, and that's the valuation. Of course, that just means you now need to figure out a sensible amount to raise based on your level of traction so far.”

Common Mistakes in Startup Valuation

There are several mistakes you could make when valuing your startup; however, there are two main pitfalls you could face.

Common Mistakes in Startup Valuation

Do not assume a valuation is permanent.

A startup is worth whatever an investor is willing to put into it. Part of being a business owner is accepting that you might not like every valuation you receive. There are, however, several variables in place, and no matter how high or low a valuation may be, it is never permanent, nor is it necessarily correct.

Do not assume a valuation is straightforward.

When it comes to business, hardly anything will be straightforward.

Even when you receive a valuation you are happy with, you must still discuss everything in great detail with the investor to ensure you are all on the same page.

In Conclusion:

There are several considerations you must make when valuing your startup. You can use these factors and methods to find ways to add value to your startup. Evaluating your company will ensure that you cover all necessary angles and show investors that your business is worth investing in.

This is where Angels Partner steps in, helping investors in their search for ambitious and likely to succeed startups.

Our selection process is rigorous and the matchmaking is affinity based to ensure each meeting is qualified and of economic interest to both parties.


About the author

Yohann Merran

Yohann has a successful track record in founding startups as well as senior management experience at top software companies. He is a mentor with a passion to inspire, educate and support individuals in their quest for increased performance, confidence and

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