It is difficult to figure out how to value a startup with no revenue. Despite that pessimistic caution, techniques exist for determining the value of a startup that has yet to generate revenue. Accordingly, this article offers the best methods for valuing a Pre-Revenue startup.
What is Startup Valuation?
A startup valuation is the market value of the company. The worth of a startup is mainly determined by its stage and whether or not another party has invested in it. However, a variety of elements must be considered, including the management team, industry trends, product demand, and marketing risks.
An investor invests in a business in return for a portion of the company’s stock during the fundraising round. This is why startup valuation is critical. Moreover, a startup valuation should consider every element that influences the company’s business, specialty, market, or industry.
Valuation of a Pre-Revenue Startup
The strategies for valuing pre-revenue startups are only helpful as a starting point for the conversation. However, computation of future worth would be required for an accurate valuation. It would include forecasting future sales and, perhaps, profitability over a specific time period.
If the company is still in the pre-revenue stage, you can use the cash invested in it to value them. You will need to figure out who their target market is, how much penetration they want to achieve, and when they expect to reach it.
In a pre-revenue startup, there is still a lot to think about. However, the most crucial factor to consider is who will utilize it. We can also use the product of traffic and advertising rates to estimate revenue.
How to Value a Startup with No Revenue
1. The Berkus Approach
The Berkus approach determines the value of a startup before it generates any revenue. Rather than financial estimates, it concentrates on risk concerns.
The approach is only applicable to pre-revenue firms that are still in the early stages of development. However, the Berkus technique is not suitable when valuing a business with regular revenue streams.
It is a reliable method for estimating worth, but it lacks the flexibility that some individuals need because it does not take into account the market.
2. Scorecard Valuation Approach
A startup is appraised using this technique based on an updated benchmark value. The benchmark value is then tweaked to account for crucial details that support a lower or higher assessment.
In basic terms, the scorecard technique compares the target firm against other similar companies in the industry.
Here, we generally use the stage of development, business industry, and geographic location to compare the startups.
3. Risk Factor Summation Approach
In evaluating the valuation of pre-revenue startups, the Risk Factor Summation Method analyses a considerably more extensive range of parameters.
This technique evaluates a business based on numerous risk criteria, with the higher the risk, the lower the startup’s worth. As a result, one can use this approach to evaluate businesses in their early phases before they generate money.
4. The VC Approach
The venture capital strategy is ideal if your startup has yet to generate income. This approach is reasonably practicable and best described as a two-step procedure.
First, we compute the business’s terminal value throughout the harvest year. Second, we determine the pre-money valuation by working backward from the predicted ROI and investment amount.
It depicts the thinking of investors who want to get out of a company in a few years. On the other hand, the venture capital approach necessitates a number of assumptions to arrive at a valuation.
5. Comparable Valuation Approach
We can compare the value of a Startup in mainly two ways. The first method is the most prevalent, and it examines market comparables for a company and its competitors. The second comparables technique looks at market transactions involving similar businesses or divisions.
It is the most extensively utilized method since the analysis is simple to do and always up to date. We may also use trading multiples like P/E, EV/EBITDA, and other ratios to compare the startups.
An investor can acquire a sense of the equity value using this method. However, if you are comparing two firms that make similar products or provide similar services, this strategy could be the best option.
There are a number of criteria that determine the best valuation technique, including the rationale for the appraisal. Finally, there is no reason why you should not utilize various valuation methodologies for the same firm and average the results.
Having said that, pricing a pre-traction or early-stage business is more art than science. And in many cases, the value is based mostly on the amount the founders can persuade investors they require, as well as the investors’ ownership expectations.
All of the approaches stated above are applicable to pre-revenue startups. All you have to do now is familiarize yourself with them and implement the best ones into your company. It is just as crucial to pick the right valuation technique as it is to execute a valuation.