“Calculating” your Pre-Revenue Valuation
As a rule of thumb, I always recommend postponing fundraising from outside investors to as late in your company’s development as you can afford. But just the fact of being based in an expensive city like Singapore doesn’t always allow for that. So there you are with a great business idea, an MVP, a small team, some friends for users and a brilliant pitch that got your foot in the door of a few potential investors. The investors already told you they might put up S$100k to get in on the action after some checks. Now the ball is in your court to tell them what that S$100K will buy them.
The Startup Buddy raised its’ own seed earlier this year. We had made a few dollars, but nothing to build any serious projections with. The same goes for most of our fundraising customers. For a startup that is developing a product from scratch and new to the market, generating early revenue is hard. Getting your customers to fully understand what you are doing is difficult, let alone having a lot of them pay for it. And if you do manage to get that done, your revenue numbers will rarely be significant enough to predict anything for the future.
Investors will want some form of equity in the company. Founders typically want to give away as little as possible of their baby. A higher valuation of the startup will translate into a lower amount of shares that needs to be given to the investor in return for the S$100K investment. Assuming you have a serious investor onboard, just setting your valuation at some bizarre amount like S$100 mln. is not a good approach. They will walk and never look back leaving you still unfunded.
So then should the valuation be S$100K, S$500K, S$1 mln or S$10mln?
Sorry, I don’t know, because as you might have guessed already, it depends. In the end, the pricing which will end up in your shareholders’ agreement is a product of your negotiation skills. But make sure you have a logical rationale for it that you can explain and helps in your negotiations.
1. Compare
You are not the first ever startup that has come up with your business idea and approach. Everyone has competitors. Most of the time competitors are a nuisance you need to deal with, but in this case, it’s your reference points for your valuation. Many platforms like E27, F6S, AngelList and, Crunchbase lets you find investment data on a lot of startup companies. In most countries, you can also buy the company file from a competitor to see who their investors are and derive the valuation from that. Do make sure you try to find recent and comparable companies of course. The more alike in terms of stage, geography and, Industry the better a reference point you have.
2. Differences
Next is understanding the differences between your own company and your reference competitors. Try to figure out how mature their product is compared to yours in terms of development and traction. Look at the team composition and make an honest comparison to the skills and experience in your own team. It should make a big difference if their primary market is in another country, even if everything else is the same. One platform in Indonesia and a copy of that platform and business in the USA will make a huge difference in the appropriate valuation.
While you are figuring all of this out, be honest with yourself. This analysis should give you a solid position when discussing the terms with your investors. Telling yourself your team of 5 fresh graduates is more or less as good as the competitor’s team of 5 Google, Facebook and Amazon veterans, when you startup is just making a fool of yourself and not helping your next steps.
3. Score
Now makeup whatever score you like as long as it is consistent. For example score on a scale of 0 to 10 for all important factors, where 0 means your team is totally unfit for doing what you do and 10 means Mark Zuckerberg, Elon Musk and Jeff Bezos are the founders. Alternatively use percentages where 150% means you consider your team is much, much better as the reference competitors and 30% means they have a big edge on let’s say product quality.
The factors you score for should vary and if you understand your product or market well, you are able to come up with some really important business aspects that will distinguish your startup from others. The more generic startup aspects The Startup Buddy scores companies for within our investor platform, are most importantly team and investment opportunity. On top of that, we score for execution, growth, market opportunity, value proposition, and competitive edge. Since these aspects have been derived by our partner Golden Egg Check from 15000 pitches and over 800 deals it is safe to state these need to be scored for sure.
Lets’ assume you will score yourself at an average 7 for the aspects you looked at and the competitor at 3. If the competitor was valued at S$300,000 (yes, I am lazy in getting my calculator and making this a challenging one) your pre-money valuation would be S$700,000. Ideally, the scoring is done looking at a few different companies so as to ensure that you have exhaustively compared competitors while maintaining consistency.
4. Calculate
So where are all the formulas, calculations and, discounted cash valuations? Remember I started this article by saying you are a pre-revenue company and that extrapolation on zero is not very useful? Obviously, it is good to have an understanding of some calculation options and know the difference between pre- and post-money valuation. And since we already determined you have a brilliant startup, at some point you will need this knowledge too. But at this stage, there is little hard evidence to prove the value of your company with. So the above analysis is mainly to make sure you are able to have a solid, understandable story for your valuation which you can use to then further negotiate. The negotiations are based on current demand for your type of business, the need of the investor for an investment like yours in the portfolio, and a lot of things you probably don’t have control of. It also really helps just to be a nice guy or girl that knows what you are doing and understands negotiations.
Investors often are not much more mathematical by the way. They have some restrictions when using other people’s’ money to do their investments. Those rules and restriction are captured in their mandate and will make having a calculator on hand more necessary. But if you see that calculator being put on the table, remember the following quote from a Sequoia Capital partner;
“In conclusion…It all depends….More art than science….The Market Decides….” ~Pieter Kemps
The Startup Buddy is SEA’s founder friendly Startup builder. We provide step-by-step guidance through specially designed missions, mentors from around the world and curated content to help you in your Startup journey! Find out more at The Startup Buddy!
