Valuing a startup is often essential for many people, especially for investors. A startup may start with a good amount of revenue. On the other hand, some get started with zero revenue. Generating a decent amount of revenue can take years to establish. It is hard to evaluate a startup without revenue. However, through this article, you will know how to value a startup company with no revenue?
Purpose Of Valuation For A Startup Company?
When a startup company wants to see its ongoing progress, it will need a proper valuation. Through this process, the growth rate can be analyzed. You will be able to understand either the company is going in the right direction or not.
The second purpose of the valuation of a startup is for the investors. People having huge money always want to invest in a good company having a bright future. But for startups, it always hard to attract investors to invest. So a good valuation can attract the attention of the investor to the startups.
The third purpose is fundraising. When a company invites the public to invest in its projects and sells its shares, it requires a good reputation and information about the company. Therefore, valuation can provide such information to the public to gain trust and take part.
EBITDA A Traditional Valuation Process
As when we talk about the valuation process, the most common and traditional process is EBITDA. It is the combination of the following things:
Earnings before interest, taxes, description, and authorization. This matrix is used as a traditional process to track the cash flow of a company.
In easy words, just look at the formula of EBITDA.
Net Income + Interest + Taxes + Depreciation + Amortization= EBITDA
When investors want to see a company’s performance either making a profit or not, they use the EBITDA method. In this way, they can compare the performance of a company to the other same companies. Similarly, a company itself can use this method to see the progress and requirements of a company. You can read an explanation as well from here.
Ways to Value A Pre-Revenue Startup
There are four well-known ways to solve your query of how to value a startup company with no revenue. Therefore, all of the mentioned below methods help to evaluate a new company properly.
In this method, there are five valuable elements to assess a company. A value of $500k is set in each element, which is $2.5 in total, and a company is analyzed based on that. In this case, an investor can determine the growth of a company and the possible profit that he can draw out.
- The five elements of the Berkus method is
- Business Niche
- Product Prototype
- A Quality Team
- Launching Product And Sell-Outs
Scorecard Valuation Method
This is a more comparable method. As in the method, the comparison is made between the companies of the same niche, same stage, same region, which means everything same. When a company has everything the same as the other one, and If one company has a value of $20M, the other will surely have $20M.
So the primary method is to find the same company for the company to valued. This method relies on the following elements.
- Management Strength
- Size of opportunity
- Product or Technology
- Competitive environment
- Marketing and Sales
- Financing Needs
- Miscellaneous Elements
VC or Venture Capital Method
This method is most relevant to the frequently asked question of how to value a startup company with no revenue. The venture method predicts the future revenue of a company. In this method, there are two steps.
The first step is to collect the terminal value during the harvest year.
The second step is tracking the ROI and investment amount for the purpose of per-money valuation.
Risk Factor Summation
This method is like the combination of Berkus and the scorecard method as it goes deeper inside to analyze a startup company by focusing on 12 risk factors. So these are the risking factors ranging from high risk to low risk.
- Potential exit
- Sales and marketing
- Stage of business
Mistakes Startups Mostly Do
Mistakes are the part of life as it teaches a lesson and shows the right directions. As men learn from experiences and the same case with the companies. While making efforts of how to value a startup company with no revenue often leads companies to make mistakes and taking wrong steps.
To avoid such kinds of mistakes, we have shared the common mistakes that companies make in generating revenue with no revenue. So you can prevent such things.
The first thing you should do is not to consider the valuation as permanent. With time it changes, so never sit back and relax once you get the valuation.
The second thing to keep in mind never to be straightforward in your relations with the investors. Always keep things up to you and not let everything go outside.