By Fernando Berrocal

‍

Establishing a value for your tech startup should be a top priorities when launching a business. In this article, we'll explain how to value a pre-revenue software startup, since doing so can be challenging–especially for a business in its early stages. 

‍

‍

Due to the numerous factors involved–including the state of the industry, level of skill, the size and demand of a product, and an unmet market need–it’s difficult to assign a value to pre-revenue businesses. You can be certain that an estimate is the right course of action for your tech firm after carefully examining the data and doing the most precise pre-revenue valuation estimates.

‍

Startup valuation is a technique for determining an early-stage company’s value. This may be achieved by taking into account several elements, including the business model, its expansion, and team size. Since they differ from sales business operations, these appraisals are crucial. Pre-revenue purchasers are willing to accept a lesser valuation, even if the firm owners want a higher one.

‍

An organization's valuation is founded on precise data and facts. If a business has financial records and consistent sales, it can determine the entire worth of the organization. Use the EBITDA metric (Earnings Before Interest, Taxes, Depreciation, and Amortization) to determine a firm's worth. As the name suggests, it is based on a business's earnings before interest, taxes, and amortization.  Note: organizations that have not yet generated any revenue or earnings do not have any of these quantitative metrics. In this scenario, such businesses' worth must be determined by taking other crucial variables into account.  When it comes to a tech startup with no sales worth, pre-revenue firm owners frequently earn less than anticipated, while investors frequently have more money to spend. A pre-revenue startup's valuation is impacted by some significant aspects which are the following:

‍

• Evidence of the idea. Traction is one of the most crucial indications for startups without income. You may have a better knowledge of an organization's operations by looking at the data points that comprise its ultimate “score” in terms of feasibility. First, there is the growth rate; this is a metric of your organization's growth with a limited budget. If they have the necessary funding, investors might utilize this to demonstrate prospective growth. Then, there is marketing efficacy. When your business is still in the pre-revenue stage, it will be simpler for investors to identify you if you can draw in high-value clients–without investing heavily in marketing. 

‍

The next area of focus is the quantity of customers using your products.  If you already have clients, you are well on your path to success–regardless, it’s preferable to have more.  Keep in mind, however, that whether or not people will pay for a concept depends on more than just passion. If your business can show that it is competent, investors will be more impressed with your progress. Investors can still see that your firm has a solid idea–even if it hasn't yet turned a profit. This improves the worth of your business.

‍

• Assemble an efficient team.  If a team doesn't appear to be prepared for success, investors won't offer capital. These qualities will spark their interest in funding your startup. Are there professionals on your support staff who have experience working in businesses? Investors are less likely to back startups where team members lack crucial professional/business experience.  Employees who have worked in relevant industries or on similar projects are valuable, as well. 

‍

Having a team with individuals with complementary abilities is another method to assure the stability of your tech startup. A programmer can't perform all tasks. If you have someone with marketing expertise working with the coder, your startup's digital marketing initiatives are likely to be successful. A variety of employees–with complementary backgrounds and talents–should be present in your organization. You could also want individuals who are able and eager to work hard since workers in startups put in long hours, and not everyone has the capabilities to do so.

‍

‍

• Try the Common Start Valuation Technique. Even while it may appear challenging to do pre-revenue appraisals on your own, you may benefit substantially from the knowledge and contacts of venture capitalists (VCs) and angel investors. You will be in a better position to bargain with pre-revenue investors and appraise a business without revenue.

‍

• Try the Scorecard Valuation Technique. Another choice for startups is scorecard valuation. It contrasts startups with businesses that are eligible for investment–but has extra standards. Find the typical pre-money worth for similar businesses first. Then, compare your characteristics to those listed below. Next, give each quality a percentage; if your performance is equal to, below, or above the industry average of 100%, compare it to that of your rivals. If your e-commerce team is equipped, well-trained, and staffed by seasoned marketers and developers, it may receive a 150% rating. To get 0, multiply 30% by 150%. To calculate starting quality, add together all the variables. Add this amount to the industry standard to get your pre-revenue value.

‍

• Try the Venture Capital method. The two-step process of VC calls for several pre-money valuation algorithms. Determine the business's harvest year worth first. The pre-money value should then be calculated using the investment amount and the anticipated return on investment (ROI). Investors usually withdraw their capital during the harvest season. The startup's future worth at any given moment is its terminal value. The Stock Price-To-Earnings (Stock P/E) ratio is another concept to comprehend. A stock that has a P/E ratio of three is three times its earnings.

‍

• Try the Cost of a Duplicate Technique.  This method entails figuring out how much it would cost to reproduce the business elsewhere, and assessing the organization's physical assets. It's essential to remember that pre-revenue investors won't put down more money than the assets' current market value. For instance, a tech startup may think about the expense of developing their prototype and the cost of patent protection. Prospects are not considered in this plan, nor are intangible assets (brand value or market trends). It is a methodical method for determining the pre-revenue value of a business.

‍

‍

In conclusion, to earn the greatest value for your business and achieve pre-revenue status, you must balance all startup criteria. It's critical that you, as an owner, understand how to evaluate your business before approaching potential investors. In order to convince them that your business has room to develop, utilize one of the previously outlined methodologies.   

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.