Pre Revenue Valuation

Venture Capital Method, May 2, 2021

Valuing a pre-revenue startup is oftentimes challenging considering the number of uncertainties present.

Mostly a clear picture of the idea can be analyzed by looking at some of the following factors:

1. Number of users: Proving that your startup already has customers is most essential
2. Marketing: Cost to acquire a customer (CAC) - lower the better
3. Growth rate: Fast user growth rate attracts the attention of investors
4. Free users vs paid subscribers
5. Unique idea and potential of customer adoption
6. How soon investors may exit and at what multiple of

While founders are already working on some or all of these considerations, what most founders don't work towards is estimating the valuation of their business themselves before reaching out to investors.

We at Fabel, recently worked on a pre-revenue valuation for an EdTech / Project Management startup using the Venture Capital method. At a high level, our analysis involved the following steps:

1. Time to exit for the investors - 3-4 years
2. Expected Revenue and EBITDA in 3-4 years
3. EV/Revenue multiple for the companies in the similar industry - 6x - 8x
4. Target rate of return, which measures what venture capitalists believe is a justifiable return, given the risk that they are exposed to



Discounted Terminal Value = Estimated exit value/(1+Target return)^n

5. Discount for lack of marketability - Since comparable companies are public they are highly liquid whereas startup is not that liquid. This warrants a discount for illiquidity or aka discount for lack of marketability.

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