Valuing a pre-revenue startup (more VC facing)

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I'm currently at a tech company and we are going to an early round of funding.  Was wondering if people could provide some resources or guidance regarding pre-revenue startup valuation with negative EBITDA.  I have a public comps and precedent transaction analysis but, there are not many comps out there that are in or like our business.  Also, the valuations are not even ballpark.  

I also tried the Venture Capital Method of valuation but am having some pitfalls (ie dont know what hurdle rates to use ect.).  

Could anyone suggest other valuation methods?  Maybe some resources to use when putting these models together?

Also, if there is any VC analyst out there that would mind me PM'ing them a few Qs about my model, that would be awesome.

Thanks in advance - I owe ya's.  Will be put to good use.

Comments (11)

 
  • Associate 2 in PE - Other
Sep 23, 2020 - 5:49pm

Since you're at a tech company w/ burn and no revenue... I don't think there is any specific method to get a "value". From my limited understanding of how VCs operate and founders think, you must have a $xxmm amount of capital you want to raise and VC have a % ownership they want to get.  So, how much ownership do you want to give to the VC firm? You can back it in from there.

I think most VCs expect companies to "grow into the valuation" anyways so you mine as well try to raise as much capital as you can with giving up the least amount of ownership, especially if it is an unsophisticated VC. You guys might get screwed if you raised at too high of a valuation and then have a down round. You'll get crushed with more preference if you don't hit the expectations.

 

 

 
  • Associate 2 in VC
Sep 23, 2020 - 6:12pm

Simplest way is to look at public and private M&A comps and compare the growth rates to yours to see which revenue multiple fits your current growth rate. If you have any tech banker or VC friends, they should have these numbers to reference.

Even if your business doesn't really fit into a particular sector, it's in your best interest to make it fit into one so VCs can understand the nature of the business easily.

What does the company do?

 
Sep 23, 2020 - 7:12pm

This is helpful.  We do AI but in an unconventional advertising space.  But we are neither considered an advertising business or an AI centric company.  Been talking to a few VC's in mobile, AI, media, etc.  But, we don't seem to fit any one focus perfectly - a lot of "we wont lead, but would follow."  Not sure if the money will disappear when its check signing time but either way need to know where we stand re value.  We have a few different unique revenue streams so I am trying to somehow work in a some of parts, just haven't gotten far enough into the process yet to know if it will work.

 
  • Associate 2 in VC
Sep 23, 2020 - 7:41pm

Yeah, unless the VCs you're talking to strictly co-invest, that generally means they're not familiar with the space/market and will only come in if a brand name commits to leading the round. And a name brand will only come in if you have one or more of the following: game changing product, undeniable product market fit and traction, experienced and/or incredible founder(s). I suggest you meet at least one of the criteria and then approach top VCs - otherwise, it'll be tough for you to find a credible lead investor.

 
Most Helpful
Sep 24, 2020 - 12:28am

Buy Brad Feld's book "Venture Deals" as a general explainer for VC. It will help you a lot.

RE: valuation, generally comps to similar deals...if you know what they're like. There is not real set way to value preseed/seed level companies. It's really impossible pre-revenue or with small amounts of revenue.

 
Sep 24, 2020 - 4:29am

This is a good book and source for calibrating "the package", as valuation is only one element to consider. Already good advice on approaches, such as I) how much money you need (at least to get to next significant milestone and raise), ii) how much % do you want to give away. For the VC method, depending on situation can be quite spurious, but in general a good additional data point. For it to roughly work, you can ask broadly your VC contacts on their hurdle rates. There are other methods such as Berkus and whatnot. Best is to get a few interested (reputable) parties that can lead and discuss with them. There are plentiful of mechanisms to structure the round and even correct later (of course,bif needed) and no serious VC wants to screw the entrepreneurs and endanger it's investment and upside. So key for you is getting the dialogue rolling and a few parties fired-up and loving your story/product/team and idea. Good luck and keep us posted!

 
Sep 24, 2020 - 11:47am

theoretical minimum:  solve for (i) what is the business eventually worth if the business model works. Maybe not a complete blue sky scenario but product market fit achieved, (ii) how much money you need to get there (rounds, valuation steps etc.), (iii) you still having a decent stake at exit

I would also consider the return thresholds of VC funds. If you raise at too high valuations early on and things dont work out, future rounds are impacted

In reality, you dont set the price in a vacuum so i would work around what people tell you is possible and optimize that

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