Pitching A Dream: How To Value A Startup With Zero Revenue

How to value a startup with zero revenue? Startups need funding to transition from the ideation phase to an actual marketable product. To raise that funding, the first step is valuing the fledgling venture. An accurate valuation is crucial since investors use it to determine the startup’s potential.

They need to see a number before they can estimate the amount of funding they can offer. These metrics also dictate the equity they’ll require and the company’s growth prospects. At the early stage, the startup’s financial data is all about projections–and that includes revenues.

If you have yet to start selling the product, there are no revenues to discuss. Without this essential metric in the calculations, how would you project the startup’s worth? How will you reassure potential investors that the idea is worth backing? Without revenues, valuation becomes primarily subjective.

Entrepreneurs Start by Identifying an Opportunity

Building a business in an established industry with proven products and a ready customer base is easy. Creating and selling variations of successful products is streamlined, as is the valuation, since there are adequate comparable projections. Investors can also base estimates on industry trends.

But what if you’ve developed a disruptive concept that has the potential to create a unique niche? At this time, you’ll have no precedents or historical data to guide estimates. For instance, the market, products, cost structures, and time frame for implementation are entirely unknown.

You’re not even sure about the customer base, the marketing and advertising strategies you’ll use, and whether competition will catch on. Building a company with so many unknowns and variables can present what seems like an insurmountable challenge.

But raising funding for it is an even bigger hurdle. Particularly when you’re operating in niches that require a large amount of capital investment even before the first product launch. Some examples include tech, oil and gas, and building and construction.

These sectors typically involve massive investment for creating the initial infrastructure, along with the costs of machinery, equipment, and talent. Investors will need assurance that the investment will yield substantial returns eventually. That is, if they are willing to sustain the risk over a long period.

Typically, investors rely on verifiable financial and other metrics to determine valuation, which translates the vision into quantifiable terms. But what if these numbers are missing entirely? How to value a startup with zero revenue? Ready to dive in?.

What Does Startup Valuation Indicate to Investors?

We cannot iterate this enough! Valuation is the framework on which investors base their decisions to back the company. Here’s what they’re looking for:

Evaluating the Startup’s Potential

Whatever the formal funding source you’re targeting, whether angels, venture capitalists, or even crowdfunders, they need to assess profit potential. Investors are seeking opportunities where they can invest their money and expect substantial returns with minimal risk.

When valuing the company, they’ll add up its tangible and intangible assets, along with sector-specific variables, to calculate a number. Since this is a pre-revenue valuation, investors also want an estimate of the value they’ll recover on exiting the investment.

A higher valuation translates into lower risk and higher return potential. It also enables you to raise a higher amount of capital with more favorable terms and conditions.

Calculating Equity

Using any of the standard valuation methods, you’ll estimate the equity investors expect for their capital infusion. If the company value is high, you can expect lower dilution. Investors also estimate the company’s value after the capital raise to ensure that it is growing well.

A higher post-money valuation indicates that their ownership stake is appreciating well and that the investment is viable. For instance, your startup is valued at $100M before funding, and investors offer $50M. It is now worth $150M, and investors acquiring a 25% stake will receive equity worth $37.5M.

If the total company value appreciates and reaches $200M, the investors’ stake also increases in value to $50M. This is the potential they are looking for.

Benchmarking Company Performance and Strategizing

Valuing a company before funding lays down a benchmark figure. Using this number, you’ll evaluate its performance in terms of growth and success. Being able to track progress enables you to adopt the right strategies for consistent scalability.

You’ll also estimate compensation packages for the team and set achievable financial goals. Most importantly, a higher valuation gives you negotiating leverage when discussing terms for fundraising or entering into strategic partnerships. These include entities in supply and distribution chains.

How to Value a Startup with Zero Revenue

Considering that standard valuation techniques won’t work well for your disruptive startup, you’ll use other aspects to demonstrate viability. When creating the pitch deck, include slides with projected numbers of the startup’s potential achievements.

You’ll also include intangible assets that go beyond intellectual property (IP). Working with your expert fundraising consultant is always advisable. You’ll compile and organize the data and other information into a compelling narrative. Here are some of the key metrics you’ll include:

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Top-Notch Founding Team

Remember that the team slide is one of the most crucial aspects of a pitch deck. More than the idea and numbers, investors want to know the people behind the company. This is the asset they will back, and they need information about its capabilities and expertise.

• Your team should have a proven track record working with successful startups. Listing the companies and projects they have previously worked on, along with their achievements, inspires trust and confidence in investors.
• If team members have sector-specific or related experience in top management roles, that’s even better. Demonstrating that highly talented and in-demand engineers and tech specialists are interested in working at the company is impressive.
• The team should have well-rounded skill sets that complement one another, for instance, sales, product development, marketing, and business management.
• Robust leadership and a strong culture can make or break a pitch. A team is more likely to perform well if members are dedicated and committed under a well-qualified leader.

Don’t hesitate to include the team in the presentation. Leverage their skills and knowledge about the product and its features to convince investors. Having members in the conference room interacting with investors can create a great impression. Offer investors the opportunity to interact with the team.

Proof of Concept: Market Validation

Proof of concept demonstrates that the product has market validation and is generating demand. You may not have started earning revenues yet, but customers are showing interest and engagement with the brand. The POC also indicates that the business model is viable and will have user adoption.

• A growing customer base or list of users is showing interest and demand for the product. You’ll include this metric even if customers are not paying yet. Users signing up for demo versions or engaging with questions and queries indicate early traction. It’s a positive sign.
• Growth metrics that indicate minimal momentum, even with limited capital, attract investors. It signals that the startup can achieve accelerated scaling if backed with sufficient funding and expertise.
• Low customer acquisition costs show that the startup’s marketing and advertising approaches are incredibly effective. You’re attracting high-value customers who appreciate the product and its features and are eager to place orders.

Minimum Viable Product (MVP)

Early-stage startups often lack a minimum viable product (MVP), particularly during the development stage. Don’t let that be a deterrent when strategizing how to value a startup with zero revenue. Having a working prototype enables investors to see a tangible product and understand its capabilities.

However, as long as you have a workable blueprint, you can demonstrate the launch timeline and degree of completion. You’ll add details about the intellectual property (IP) the company has created. If you’ve applied for or acquired patents and copyright protection for the technology, add that info.

You’ll also include projections of the licenses and royalty fees the company can potentially earn–not just from the product itself but also from the technology. Include slides that outline the problems the product can solve, as per industry standards and practices.

Additionally, include information about the market trends and gaps that the product can address.

Projected Source of Earnings and Financials

Although the startup has not yet started earning revenue, you can include a slide to demonstrate the target market. Or, the customer base is expected to purchase the products. This slide can take many other forms, such as the product-market fit and market reach.

Since you’re developing a unique product, basing revenue projections on competitor data and industry trends is not advisable. If the data is not available, it is incorrect to assume the company cannot earn revenues.

However, you can present a rough estimate of the product pricing by outlining its many features and value for money. Since it is one of a kind in the market with no competition, discuss the possible monopoly your company has.

Early adopters may be willing to pay premium pricing to buy the products. Or, even pay advances to pre-book orders. Higher prices translate not only into revenues but also into higher profits. That’s a number investors are particularly interested in.

Since the company’s financials are one of the most critical slides in a pitch deck, you should know how to present financials for a startup with no revenue. Check out this video where I explain how it’s done.

Startup Valuation is Not Always Conventional

If you’ve been thinking about how to value a startup with zero revenue, know that experts factor in other aspects. You’ll target investors who have experience in your sector and a thorough understanding of its operations. Thus, you’ll demonstrate that your product fills a gap in the market and is worthy of funding.

Several top companies have successfully implemented this strategy, including Oscar, Magic Leap, Bumbl Shopping, and Asana. Zillow‘s founder and CEO raised $32M in funding before its beta version launched in the market. In 2006, it raised the maximum capital among all the Web 2.0 era companies.

The all-inclusive real estate platform featured a search engine that listed all available properties for sale or rent. It effectively addressed a market problem and introduced a unique concept to the sector. With no competitors, Zillow developed an incredible market presence.

Let’s try another example. Startups in the biotech and pharmaceutical sectors often raise millions of dollars and may spend years in research and development. However, they may not demonstrate a single dollar in revenues despite having developed intellectual property (IP) and acquired patents.

The lack of revenue, the unavailability of market sales data, and zero cash flow cycles are not worrying signals. They do not indicate that the company is failing even before its initial product launch.

Investors may be willing to base their valuation on the worth of the IP and the revenues it can generate. That is, once the IP materializes into a marketable product.

Non-Monetary Aspects Drive Valuation

Even if the company needs additional funding, investors are open to providing it since they recognize its potential. They focus on the value of intangible assets that the company has created or those in the development pipeline. These assets may not appear on the balance sheet, but influence valuation.

Investors also calculate the profits they’ll make when exiting the investment, and factor it into the company’s value. Thus, the progress the company has made so far, along with the funding it is likely to secure from other investors, are other deciding factors.

Although these aspects don’t have a monetary value, they influence investors’ decisions. Particularly since they want to participate as partners in the early stages of a potential unicorn.

Investing in the later stages may result in higher dilution and lower returns, which investors are well aware of. You’ll leverage the Fear Of Missing Out (FOMO) effect.

The Takeaway!

Understanding how to value a startup with zero revenue is like trying to forecast its future potential. This task often involves guesswork and decisions based on gut feeling rather than actual statistics and metrics. To say that it is challenging is a gross understatement.

On their part, investors are always on the lookout for the next unicorn–a company that will earn them millions. They leverage their extensive industry-specific experience to identify teams, founders, and innovative concepts that can attract audience attention.

Investors are well-equipped to evaluate multiple projects and navigate the complexities of assessing their viability. As the entrepreneur, your job is to provide all the pertinent information they need to make an informed decision. Don’t make the mistake of focusing on conventional data and numbers.

Highlight what makes your startup unique, and you can secure funding even if the company has yet to generate revenues.

You may also find our free library of business templates interesting. There, you will find every single template you need to build and scale your business completely, all for free. See it here.