Skip to main content

Ultimate Guide to Valuation of Pre-Revenue Startups

July 10, 2024

“What is my startup worth?” “Is the valuation I am being offered fair?”

Being confronted with having to value your venture without any financial data and often without proper finance training is the nightmare and reality of every startup founder. You don’t want to sell yourself short, and at the same time, you don’t want to seem unrealistic and lose a chance to raise capital.

There is a lot of confusion in the startup community around how accurate a valuation for a company with no financial history and no revenues can be and what exactly it measures.

We are here to help you understand all these topics:

In this blog we will address: 

  • Is Startup Valuation a Reflection of the Company Value, Wild Guess, or Negotiating Tool? 
  • WACC vs Investors Return
  • Two Approaches for Valuing  Pre-revenue Startups
  • Founders’ Dilemma – Being Rich or Being King

Is Startup Valuation a Reflection of the Company Value, Wild Guess, or Negotiating Tool?

There is a school of thought that treats startups as real estate.

Under this premise, the startup value is purely based on supply and demand for a given “property”, which is, in this case, a startup team and/or product. While this is a valid approach, it misses a chance to discover the underdogs, or those “properties” that seem worthless, but then, metaphorically speaking, go on to win awards and earn almost $400M in the box office, like Slumdog Millionaire.

There is also another school of thought which thinks startup valuations for early-stage startups are a wild guess because there is no data to back them up.

The Startup Station’s perspective, which we also share in this video, is different. In our view the startup valuation should be based on the company’s financial plan and driven by assumptions coming from market research, industry norms, historical data, or the company’s strategy. 

WACC vs Investors Return

The difference between WACC, or Weighted Average Cost of Capital, and the investors’ return confuses many entrepreneurs, especially those with little finance knowledge. 

Both are important valuation concepts and will definitely come up in your fundraising process. 

In this article and the corresponding video, we will learn what they are, how they differ from each other, and how to calculate them.

How to Value Pre-revenue Startups?

There are two main valuation approaches for early-stage startups: qualitative (scorecards) and quantitative. 

There are several scorecards people use – Dave Berkus Scorecard and Bill Payne’s Scorecard are the most popular. There are also several quantitative models used – the most relevant is the Venture Capital Method which focuses only on the Terminal Value of the company.

Each of these approaches has pros and cons, and so if you want to use them, you should keep in mind its benefits and limitations. Learn more in this blog and video.

Founders’ Dilemma – Being Rich or Being King

Lots of founders pay too much attention only to the company valuation. Our recommendation is to remember that it is just a part of the investor’s term sheet. Here is our suggestion:

  • Focus on long-term value of a partnership
  • Be realistic about where your company is – use financials to understand the estimated value of your company/strategy
  • Pay more attention to other clauses such as control, voting rights, liquidation preferences, board structure

If you have any questions about how to value your company, we are happy to talk. Book a call with us here.

  • About Author

Victoria Yampolsky, CFA, is the President and Founder of The Startup Station, a comprehensive resource for modeling and valuing early-stage startups. She evaluates the financial feasibility of business models and specializes in the financial modeling and valuation of pre-revenue companies. She also created a finance curriculum for early-stage founders and launched The Startup Station’s educational program in 2015. Since then, more than 1,000 founders have attended her online and in-person finance classes and learned the basics of financial modeling, valuation, and startup financing.

Previously, Victoria worked for the Deutsche Bank Research Department and performed IT consulting for CapGemini’s Financial Services Division. Victoria holds a Bachelor’s Degree, Cum Laude, in Computer Science, with a minor in Mathematics, from Cornell University and an MBA, with honors, from Columbia Business School. Victoria is also on the Advisory Board of the Computing and Information Science (CIS) Department of Cornell University.

Still have questions?

We are happy to talk to you. Book a FREE 30-min consultation now by pressing the button below and, as a bonus, we will send you a COMPLIMENTARY financial health checklist.

Press the button above to accelerate your fundraising process. We will help you create a defensible valuation and financials, investors will take seriously!