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How to create a Pre-Revenue Valuation?

Hello all,
My start up is still pre-revenue, although we will be beta testing next month, and launching in July. So, very soon we'll hopefully be able to show traction, revenue, and more.
But, what factors go into a pre-revenue valuation? I may have a potential investor coming in for 6 figures, and I'll need to assign a share of equity.
We have already raised over $100K, have most of our app developed, have an incredible team, deals signed with 7 content providers. Do all of these factors help a valuation? If so, what are they worth in a dollar sense?
Thanks for any input on this.

6 Replies

Karl Schulmeisters
1
0
Karl Schulmeisters Entrepreneur
CTO ClearRoadmap
search the threads - there are a bunch of discussions on this already
Mike Whitfield
0
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Mike Whitfield Entrepreneur
Sr. Software Engineer, EPAM, Google
How much time would it take someone to copy you (it will cost the Mr. Wonderful replica team this much to replicate your business)?

How many users do you have and how much is each user worth after your calculations of conversion?

How much is each partnership quarterly after you calculate conversion? Don't overcomplicate this metric.
Richard Liang
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Richard Liang Entrepreneur
CEO, Founder at Preo
Investors look at a potential investment as risk vs reward. How much risk is this investor taking on by giving the company money now for your team to show product market fit? A key to this question is for you to understand the steps necessary to get your company to the next stage. Right now, you're in the easiest stage -- building product. The next step (which is way harder) is to show that your product has demand and your company can attract customers.

Each company is different, but considering you've signed deals with 7 content providers (I'm unsure of how many there are in the market), it looks like these content providers are your main customers. You should have a clear understanding of their KPI's to ensure that your contracts will get extended. I assume that this will tie to impressions, click-through, engagement, etc, but that's for you & your customer to establish, and for you to communicate effectively to your investors. Having a clear understanding of what these metrics are, and why they are important, will be very valuable for your investor discussions.

In determining an equity valuation, you should look at other companies in your stage & industry and see if you can peg a valuation to those deals as comparables. You can also propose issuing convertible notes at a certain valuation cap -- this way, you won't need to set a valuation now (it will be set when you're ready to raise your series A) and your angel/seed investors will be able to have an immediate gain if your valuation skyrockets.

DISCLAIMER: our company raised a convertible debt round at sub $2MM.
Lonnie Sciambi
2
0
Lonnie Sciambi Advisor
"The Entrepreneur's Yoda"- inspiring, guiding entrepreneurs to achieve their dreams - CEO Mentor/Advisor, Author/Speaker
Some interesting comments. Pre-revenue valuation if you have no previous track record is almost more art than science. Critical to it, though, is how much money you need and what you are going to do with it. Don't make the mistake of taking less money than you need because you're concerned with dilution (although ultimately always a concern - but early on, capital trumps everything). Too many entrepreneurs establish valuation based on that. I think Richard had a couple of good points (and some success with one of them). Look for comparables - always difficult, especially in technology, but if you search hard enough they'll be a couple out there you can point to. But your best bet, as Richard noted and proved, is using convertible notes. It protects both sides, quite well. But get a good and knowledgeable attorney to help you with the particulars, especially defining conversion. Hope this helps.
Chris Carruth
0
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Chris Carruth Advisor
VP/Director. Strategy | Business Development | Operations | Product | Solutions

If you Google the subject there are articles that go through several approaches.The one that I think holds the most validity starts with a normative value of $2.5M and then has a series of measures that you score, with each adding to or subtracting from the default value by multiples of $500k. So if measure one is totally missing it might devalue your company $1M but it may be offset by measure two where you are ahead of the game.There are others butthis one "smells" rationale.

Comps, which is what most CFOs prefer to use as input to valuation, are useless in a pre-revenue scenario. And you can't use multiples as most require top line sales or NI or EBITDA, which you don't have either.

Chris Carruth
0
0
Chris Carruth Advisor
VP/Director. Strategy | Business Development | Operations | Product | Solutions
Last comment re convertible notes...these can be capped and uncapped. Search the difference and consult with your attorney, who hopefully has a background in both. There are pros and cons of going this route, capped or not. As is the case with startups...nothing is ever easy LOL.
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