How to Value a Pre-Revenue Startup

In this post, Jed Ng, from Angel School discusses the benefits of angel investing through syndicates and the process of building your network for syndicates.

You can find the original post here.

Let's hear what Jed has to say.

Ready to invest in a startup? First things first -- how to value a startup with no revenue?

Investors need to understand the basics of valuation, analyze the market landscape, assess team dynamics, and examine financials (or lack thereof).

This can be a complex process, but understanding each step will ensure an accurate value assessment for startups that do not have any revenues coming in yet.

With this guide on how to value a startup with no revenue, you'll have all the information you need to evaluate an investment.

The first step in how to value a startup with no revenue is understanding the nature of a valuation.

Valuation is the process of determining the value of a startup (current and future). It is an integral part of angel investing as it helps investors determine how much to invest in a company and what kind of return they can expect.

There are two main types of valuations: pre-money and post-money.

Pre-money valuation takes into account all assets owned by the company before investing. This includes cash, intellectual property, equipment, inventory, etc.

The pre-money valuation is then used to calculate how much money should be invested for the investor to get their desired return on investment (ROI).

Post-money valuation considers both pre-existing assets and the money received by the startup from the investor.

Another important concept regarding startup valuations is "runway" – this refers to how long before a startup runs out of money or needs more funding from outside sources such as angel investors or venture capitalists.

Runway calculations consider factors such as burn rate (how quickly a company spends its funds) and revenue projections to determine whether or not there will be enough capital available for operations.

Finally, other factors may affect a startup's value, including market trends, competitive landscape, customer feedback/adoption rates, and team dynamics. Investors must carefully consider these factors when making investment decisions based on current valuation metrics.

Understanding the basics of valuation is essential for any investor making an informed investment decision. B

y analyzing the market, investors can gain further insight into a startup's potential and make more informed decisions.

Analyzing the market is a crucial step in how to value a startup with no revenue. It’s important to consider industry trends, competitive landscape, customer demand, and growth potential when determining if there is potential for success in its current market or if it needs to pivot into another one.

Industry Trends

When analyzing the market, investors should note any changes within the industry, such as new technologies or shifts in consumer preferences.

This will help them determine whether or not this particular startup has what it takes to stay ahead of these changes and remain competitive.

Competitive Landscape

Investors should also assess how their target company stacks up against other players in the same space. They should look at pricing models, product offerings, and customer service strategies to understand how they compare with competitors.

This will give them insight into how well-positioned their target company is compared to others on the market and whether they have the edge over their competition.

Customer Demand

Understanding customer demand is key when evaluating a startup’s potential for success. Investors need to understand who their customers are and what kind of products/services they want so that they can determine if there is enough demand for this particular business model or not.

Additionally, understanding customer preferences can help investors decide which features would be most beneficial for their target company’s product offering so that it stands out from its competitors’ offerings.

Growth Potential

Finally, investors need to consider a startup's potential for growth before investing in it. This means looking at scalability, profitability projections, and long-term sustainability plans.

By considering all these aspects during the analysis stage, angel investors can set realistic expectations about future performance based on data rather than speculation.

Now, let's look at how team dynamics affect the value of such a company.

When assessing team dynamics, looking at the experience, skill set, track record, and commitment level of the individuals involved are essential.

Experience can be determined by looking at each individual’s work history or educational background.

Skillsets should include technical abilities and soft skills such as communication and problem-solving.

Track records should be examined to see how successful the team has been in previous projects or businesses they have started.

Lastly, commitment levels are essential to ensure that everyone on the team is fully invested in making this business successful.

It's also important to consider how well these individuals work together as a unit.

Do they collaborate effectively? Are there any potential conflicts between members of the team? Can decisions be made quickly and efficiently?

These questions can help determine if the team can handle difficult situations when they arise.

The size of a startup’s founding team can also play an essential role in its success or failure. A small founding team may lack specific resources or expertise needed for growth, while a sizeable founding team could lead to disagreements over decision-making processes.

Angel investors must assess which size suits their investment goals before committing funds.

Angel investors must understand what motivates each member of the startup’s core leadership group: financial gain, personal satisfaction from building something great, or recognition within their industry peers.

This helps build trust between investors and entrepreneurs, which is key for long-term success.

Having clear expectations from both sides in the future ensures that all parties remain committed throughout different stages of development and growth trajectory.

Moving on, let's examine the financials of the company.

When evaluating a startup for angel investment, examining the financials is essential. But how to value a startup with no revenue?

Cash flow projections and burn rate are two key metrics to consider.

Cash flow projections can help investors understand how much money will be needed to keep the business afloat until it starts generating revenue.

The burn rate indicates how quickly the company is spending its capital and gives insight into whether or not it’ll need additional funding to stay operational.

Capital requirements should also be considered when assessing a startup's financials.

This metric shows how much money the business needs to invest to reach profitability or breakeven point. Investors must understand this number to know what kind of return on their investment they can expect if all goes according to plan.

In addition, potential investors should look at other financial metrics such as gross margin, net income, operating expenses, and debt-to-equity ratio to better understand the company’s overall financial health and performance over time.

These numbers provide valuable insights into how the business is managed and where improvements could be made for it to become more profitable down the line.

Finally, analyzing cash flows from operations (CFO) is another crucial step in how to value a startup with no revenue.

CFO provides information about whether or not enough funds are coming in from customers/clients/partnerships, which helps determine if there will be sufficient liquidity for day-to-day operations without any external sources of financing.

All these factors must be considered before investing in an opportunity.

Intellectual property rights, including patents, trademarks, copyrights, and trade secrets, can impact a company's value.

Customer base size and potential growth rate are also important in how to value a startup with no revenue.

Knowing how many customers currently use the startup's product or service and understanding its potential for future growth will help determine its overall value.

Partnerships/alliances/investors can also affect the valuation of a startup. Having strategic partners or investors who believe in your vision and are willing to invest capital can increase its perceived value significantly. It's essential to understand which companies have invested in similar startups before so you know what kind of deals they're likely to make with yours.

The business's location is another factor to consider when evaluating its worthiness for investment purposes. Companies located in areas with access to resources such as talent pools, venture capital funding opportunities, or government incentives may be more attractive than elsewhere.

Finally, it is essential to consider any legal risks associated with investing in a particular startup before making an offer. This includes researching regulatory hurdles and potential litigation they may face if things do not go according to plan.

Considering all these factors during your evaluation process, you can set realistic expectations about what kind of return on investment you could expect from investing in a company.

When it comes to how to value a startup with no revenue, it's essential to understand the basics of valuation, analyze the market, assess team dynamics, and examine financials.

With the right research and due diligence, you can make smart investments with long-term benefits.

Jed is the Founder of AngelSchool.vc - a program dedicated to helping angels build their own syndicates.

He has a track record of exits and Unicorns and is backed by 1000+ LPs.

He previously built and ran the world's largest API Marketplace in partnership with a16z-backed, RapidAPI.

AngelSchool.vc is a Fellowship program dedicated to helping Angels build, run and scale their Angel syndicates. We equip Program Fellows with our syndicate blueprint in their first eight weeks and give lifetime access to our investment community and alumni network beyond that.

Apply to Angel School's next cohort here.‍

Angel School’s syndicate is backed by a global Super Network of 1000+ Operator-Angels and deploys $MNs annually.

Disclaimer:While I am a lawyer who enjoys operating outside the traditional lawyer and law firm “box,” I am not your lawyer.  Nothing in this post should be construed as legal advice, nor does it create an attorney-client relationship.  The material published above is only intended for informational, educational, and entertainment purposes.  Please seek the advice of counsel, and do not apply any of the generalized material above to your facts or circumstances without speaking to an attorney.