Pre-revenue valuation can be a tricky affair for every promoter.
Various things are involved in such a valuation like management
team, market trends, demand for the product, innovation trend,
On evaluating all the factors pre-money valuation could be only the best estimate. Business owners would like a higher valuation & pre-revenue investors prefer a lower one with a promise for higher ROI. Assigning a valuation to start up with no revenues is a challenge.
The method used for this valuation is
1. Comparison of startup to the other funded startups modifying the average valuation methods based on region, market & stage of funding.
2. Compare the perception of other startups in the same region using factors such as the strength of the management team, size, product, technology, competition, market environment, additional investment.
3. Value of the founding team, skills, diversity, commitment.emerging industries, hot trends.
4. Use various formula based norms like VC method, post-money pre-money valuation, Berkus Method based on the concept, scorecard valuation method & various other. In this valuation, it's best to discuss with the investor to make sure all are on the same page along with the investor's interest.
Getting funded is a herculean task for most of the startup
companies. It is a balancing act with the promoter on one side &
the investor on the other. Once the funding is done for the
company it's also essential to spend wisely the amount that is
funded. Investor funding is made available based on the plans and
the confidence reposed in the organization by the investor so its
always essential to spend the same in a wise manner.
Stick to your plans: If you have been funded by the investor you are accountable to the investor to do what you said about the funds made available to you. Transparency in each & every dealings moving according to the agreed path may give enough confidence to the investor.
Spend wisely on tech in case you have not accessed the technology needs you need to access the same immediately & spend on it wisely.
Keep your investor in the loop: Always try to keep your investor in the loop in cases where you need to change your plans as well as funding those changed plans.
Avoid going on a spending spree, do not spend the money much on idle investments like office furniture, workspace, infrastructure, equipment, business trips & lunches.
Save the splurge for the day when you are bringing in more of revenue.
Early-stage Startups often hit the roadblock when it comes to
raising the funds for meeting the working capital. Unable to grow
on their own most of the promoters are forced to sell their small
stakes to investors. Most of the Startups are now migrating to
venture debts for funding their activities. It's a perfect tool
that avoids dilution thereby maximizing returns for the equity
holders. Its also considered an effective tool to uplift the
company before an IPO, Strategic partnership or M&A activity.
It's a loan that does not entail equity dilution, it compliments the equity financing & is structured normally as a three year period loan with warrants or company's stock as an option. This sort of funding is ideal for startups who are not looked at by banks for extending credit facilities for meeting their working capital needs.
Venture debt is suited for companies having visibility of revenue forecasts with a backing of their proven product market, whereas they are not suited for a higher variable revenue stream. Typically around 20 to 30% of the last equity round should be raised in the form of debt. Debt funds should not exceed 25% of the companies operating expenses.
Startups can also look at Venture debt funders as partners in the long run.