How To Value A Pre Revenue Tech Startup: The Ultimate Guide
If you’re thinking of starting a tech startup, one of the first things you need to do is figure out how to value it. This can be a difficult task, especially if your startup is pre-revenue. But don’t worry; in this ultimate guide, we’ll show you how to value a pre-revenue tech startup so that you can get started on the right foot.
Pre-revenue startups can be difficult to value due to the many variables involved, including industry conditions, reputation, expertise, size and demand of the product, and unfilled niche.
After reviewing all the information and making the most accurate pre-revenue valuation calculations, you can be sure that an estimate is the best thing for your tech startup.
What is the difference between a startup and a Mature business valuation?
A startup valuation is a method of estimating the total value of a new company. This can be done by looking at various factors such as the company’s business model, its potential for growth, and the strength of its team. Click To Tweet
Startup valuations are critical because they are different than sales business processes. Even if the company owners desire a higher valuation, pre-revenue buyers are able to accept a lower valuation.
What is the difference in a startup and a mature company valuation?
A business valuation is based on hard numbers and facts. It can calculate the overall value of a business if it has financial records and steady revenues.
To calculate a company’s worth, an approved Business Appraisal Florida team member uses EBITDA. It is calculated on the company’s profits before taxes, depreciation, and amortization.
Pre-revenue corporations do not have earnings, amortization or revenue. These businesses must consider other important factors in order to determine their business’ value.
How to value a pre-revenue tech startup?
Many pre-revenue business owners don’t make the expected amount and investors often have more to spend.
There are several important factors that impact the valuation of a pre-revenue startup:
The proof of concept
If a startup does not have any revenue, then traction is one of the most important indicators to look at. The four data points that make up a company’s feasibility or proof-of-concept can give you a better understanding of the business.
Marketing effectiveness. When your company is still in pre-revenue, it will be easier for investors to find you if you are able to attract high-value customers without spending a lot of money on advertising.
The number of people who use your product. If you already have customers, you are well on the way to success. The more customers you have, the better.
Will They Pay? It’s one thing for people to love a new idea. But will they actually write checks?
investors will be more impressed with your growth if your company can demonstrate proficiency in each of these concepts. Even if your company has not yet reached profitability, investors can still see that you have a viable business plan.
This adds value to your business.
“If the team is strong if there are leads in the pipeline, and if technology isn’t just a simple copy of what’s already out there then it has an art to it.”
Establishing a team
Investors won’t invest if a team doesn’t look ready for success. These characteristics will make investors more interested in investing in your startup technology startup:
Is your support team comprised of professionals who have previously worked in similar startups to yours? Investors are more inclined to invest in companies that have fewer experienced members than those who have been involved in similar tech ventures.
Another way to ensure stability for your tech startup is to have a team that includes people with complementary skills. A computer programmer can’t do everything.
Your startup’s digital marketing efforts are more likely to succeed if you have someone on your team with the marketing skills to communicate and collaborate with the programmer.
Your company should have a mix of people with complementary skills and experience. you also need people who are willing and able to work hard to get your company off the ground.
Startup workers work long hours, and not everyone has the means to do it.
Supply and demand
Your startup valuation will be affected if you are in a market that has more investors than business owners. Many business owners are keen to invest in a competitive market and may be willing to sell their businesses.
How Investors Value pre-revenue businesses
It can be daunting to look at your business and perform a pre-revenue valuation on your own. To get an idea of the value of your pre-revenue company, you can consult seasoned investors.
these startup valuation methods can help you understand how to value the business. Let’s take an overview of the most popular methods for valuing startups in technology.
Common Start Valuation Method
It may seem difficult to do pre-revenue valuations on your own, but it is possible to benefit from the expertise and connections of venture capitalists and angel investors. You will be able to not only analyze a company without revenue but also to negotiate a better deal with pre-revenue investors.
Scorecard Valuation Method
Another option for pre-revenue companies is the Scorecard Valuation Method. It also compares startups with funding-eligible companies, but it has additional criteria.
First, determine the average pre-money value for comparable businesses. Next, compare your company with the traits below.
Next, assign a percentage for each quality. Compare your performance with your competitors by being equal (100%), below the 100% average (100%), or above the 100% average (>100%).
Your e-commerce team might get a 150% score if it is well-trained, complete, and staffed with experienced marketers and developers who have worked for other companies. Multiply 30% with 150% to get 0.
Add all the factors to calculate startup quality. Multiply this sum by the industry average for your pre-revenue value.
Venture Capital Method
Bill Sahlman, a Harvard Business School professor popularized venture capital. Venture capital is a two-step process, which requires several pre-money valuation algorithms.
First, determine the harvest year value of the business. The second step is to calculate the pre-money value using the investment amount as well as the expected return of investment (ROI).
The harvest year is the year that An investor will leave the company. The terminal value is the startup’s future value at any given time.
Another term to understand is the Industry Price Earning Ratio (or stock price-to-earnings ratio). A stock with a P/E of 3 indicates that it is worth three times its earnings.
Calculating the terminal value
These numbers are required to calculate the terminal value.
Online research can reveal industry averages in P/E ratios, and predicted profit margins. Once you have collected your data make the following calculation:
A tech company could expect to generate $10,000,000 in revenue over five years with a 10% profit margin. The P/E ratio is 20.
The terminal value is $10,000,000 multiplied by 10% and multiplied twenty times to equal $20,000,000
Calculating the Pre-Money value
These items are necessary for the second step.
Next, use the formula below to calculate it.
Pre-Money Value = Final value/ROI = Investment amount
Imagine a pre-revenue investor seeking a 10x return on his $1 million investment.
Pre-Money Valuation = $20M/10. $1M = $1M in this scenario.
This method could be used for calculating the $1 million pre-revenue startup valuation. With a $1 million investment and reasonable growth, the company could be worth $20,000,000 in five years.
Dave Berkus, a founder of the Tech Coast Angels of Southern California, popularized The Berkus Method. It examines five important aspects of a startup business.
Risk Factor Summation Method
This is most commonly used by tech startups. Each aspect of a company is given a rating of up to $500,000.
This means that a tech company may receive a maximum value of $2. 5 million.
This pre-revenue valuation method evaluates all risks associated with a company’s launch. These are some of the risks:
An investor will evaluate your pre-revenue startup’s risk areas.
-2: very negative, -$500,00
-1 is negative, which indicates the risk of a failed startup. -$250,000.
0: neutral, $0
+1: positive, +$250,000
+2: Positive for starting a successful business. +$500,000.
the Risk Factor Summation Method can be a great tool to help you assess the potential risk to your pre-revenue startup.
Similar Transactions Method
One of the most popular methods for startup valuation is the Comparable Transactions Method. It is based on precedent. Answer the question: “How much did startups like mine cost to acquire?” “. Click To Tweet
Rapid was a fictional shipping business that was purchased for $24 Million. It had 700,000.
Subscribers can access the website and mobile app. This is equivalent to $34 per user
Your shipping company has 120,000 customers. Your company has a market capitalization of approximately $4 million.
Revenue multiples can also be found for companies in the same industry. SaaS companies can produce net sales that are 5x-7x higher than the previous year.
You must include multipliers and ratios for all differences between businesses in any comparison model. If another SaaS company uses proprietary tech, you might choose a multiplier that is lower on the spectrum, such as 5x or lower in our example.
Cost To Duplicate Approach
This strategy involves evaluating the tangible assets of the firm and calculating the cost to replicate the startup elsewhere. It is important to keep in mind that pre-revenue investors won’t invest more than the market price of assets.
A tech startup might, for example, consider the cost of producing their prototype and patent protection. This strategy doesn’t take into account future opportunities and doesn’t include intangible assets such as brand value or market trends. Click To Tweet
It is an objective approach that can be used to estimate a startup’s pre-revenue worth.
You must balance all requirements of your startup to get the best valuation possible for your pre-revenue business. Before you approach potential investors, it is important that you, as the owner, know how to value your company.
Different valuation methods can be used to show investors that your company has the potential to grow.