Raj K Pathak

Connecting Entrepreneurs with Information,Knowledge & Networking

Pre Revenue Valuation- Science or Art

January 29th, 2015

I was recently invited by “Indore Entrepreneur Network (IEN) ” to address startups. The boardroom was house full, a reflection of startup revolution going across cities and towns of India.

I was happy to see 3 women out of 20 startups present in the room though I hope to see more percentage of women at such startup events in time to come.

Major concern raised by budding entrepreneurs was “how do investors value a startup?”.

Let me confess, this is the most frequently asked question at any startup event or investor panel. So, I was not surprised if it was raised by this bubbling with ideas and enthusiasm group, too.

However, the unfortunate answer to the question is: it depends.

Startup valuation, as frustrating as this may be for anyone looking for a definitive answer, is, in fact, for some, a relative science and for others, it is more of an art than a science.

So,  the practice of valuing a startup business is squarely in the domain of little confusion.

Nevertheless, entrepreneurs need to put a value on their startups in order to raise money, and investors need to put a value on their investments to generate liquidity.

Most important for any startup is need to constantly think of how early he/she can make the start-up project attractive enough for investor to invest.

My part experience with IAN and discussions with VC friends tells me that startup need  to focus on the following to attract funding at Pre Revenue start-up phase.

Today, fortunately, VC’s & Seedfunds and angel investors are in abundance and looking for attractive investments. However for them to take a decision on valuation of Pre Revenue startup ,they look for the following things:

Founding Team :

Is founding Team committed to work on finding solution and filling identified gap for next 5 to 7 years. If founder team has ample experience, networking ,knowledge on key factors of business, all the better. Additionally, founders with success in past tend to get higher valuation.

Traction & Expected Near Term Revenues :

If start-up has 100 plus pilot customers with 50% of them near becoming paying customers, the valuation is much higher.

Growth & Engagement :

If there is existing good amount of user database and same is growing at 30% pm plus good percentage of them spend 20 mins of more daily, valuation is certainly higher.

Market Size :

VC always wishes to know the market size in terms of potential users.If 10 Million potential users is possible, higher the valuation. If 100 Million potential user can be projected, valuation can go through the roof.

Competition :

More the existing competitors or else easy for entry, lessor the valuation.

Quality of Early Investors :

If startup is able to attract organisational funding  or reputed/respected angel investor/seed fund for startup/pre-startup phase, it becomes easier to raise second round of funding at later stage.

 

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