Wednesday, February 2, 2011

How Investors Think About Valuation of Pre-Revenue Startups

A lot of my time is spent helping early-stage companies get to proof points so that they can raise capital.  They might have some seed money and are thinking or raising a Series A based on success of an early release (MVP).  Because of this, I've always tried to stay up-to-speed on how early-stage investors look at valuation of companies.  What are they really looking for?  What do you really need to prove?

There's a lot out there around Customer Development - read Steve Blank

  • Entrepreneurship as a Science – The Business Model/Customer Development Stack- Steve Blank, October 25, 2010
  • Checklists for Chaos, The Path to Success- Steve Blank, October 28, 2010
  • and reading about Lean, MVPs, etc. is a requirement.  Think about how you can prove your business model with an MVP.  I should try to come back and write about this more, but the point of this post is that it's important not to only think about this aspect.

    Bill Payne is an expert on how early-stage investors should look at valuation.  He just post: Establishing the Pre-money Valuation of Pre-revenue Startups.  It's required reading.  Especially interesting is the Valuation Worksheet towards the end.  He has a bunch of factors that investors should be considering (and generally do).

    A few things jumped out at me:

    • - Experience in sales or technology - considered a minor negative?  If you've not had a C-level but have had experience in sales or tech.  Not sure why.
    • Size of target market $100M is okay.  Interesting that they don't need to see really large markets.
    • - > $100 million (will require significant additional funding).  In fact, really large markets are possibly a downside.
    • -- need venture capital - a significant negative effect

    Key hurdles that you really should be going for in the early-stage:

    • ++ Good feedback from potential customers - that's the key hurdle
    • +++ Orders or early sales from customers
    • ++ Key beta testers identified and contacted
    • +++ Channels secure, customers placed trial orders

    1 comment:

    jerry3061 said...

    Thanks for the post, Tony. Perfect timing for our startup.