The question “how do you value pre-revenue startups?” contains a flawed assumption: that startup valuations typically rely on past revenue. Nothing could be further from the truth.
All valuation is inherently forward-looking—essentially the discounted value of all future cash flows. In venture capital terms, what matters is exit potential, typically understood through revenue growth assumptions or EBITDA projections in more mature markets.
Defining the Pre-Revenue Phase
A pre-revenue startup is a company in its earliest stage of development that has not yet generated any sales or income from its product or service offerings. During this phase, the business typically focuses on product development, market research, building a minimum viable product (MVP), assembling a founding team, and securing initial funding from sources like friends and family, angel investors, or early-stage venture capital. The pre-revenue phase is characterized by high uncertainty and risk as the company works to validate its business model and prove market fit before establishing a consistent revenue stream. While this stage represents significant challenges, it’s also when valuations are primarily based on the team’s capabilities, the potential market size, and the compelling nature of the business concept rather than financial metrics or performance history.
Mapping the Future
Valuing a pre-revenue startup follows the same principles as valuing any startup: by mapping its future trajectory. This involves a three-step process:
- Ambition to Strategy: Translating the company’s ambition into a rational growth strategy to understand potential growth rates and investment requirements.
- Strategy to Financials: Converting that strategy into projected revenue figures alongside operational expenses and cost of goods sold.
- Financials to Ambition: Completing the cycle by assessing whether the projected financial future aligns realistically with the original ambition.
This process delivers coherence, not certainty. Startups are inherently risky, and any pitch asks investors to explore “the realm of the possible” alongside founders.
A Stack of Assumptions
Every startup journey progresses through a series of inflection points and key assumptions. Revenue is merely one early proof point, demonstrating the ability to attract paying customers. Later come assumptions about scaling that revenue efficiently, customer retention, product expansion, and competitive dynamics.
While pre-revenue startups may seem especially risky, they’re simply operating with one more unknown in an already substantial stack of assumptions. Raising capital at this stage usually indicates the product is particularly expensive to build and too costly to bootstrap.
Both founders and investors can address this uncertainty through customer interviews, technical due diligence, and market research.
The Dynamics of Greatness
Great founders build strong conviction among investors, enabling them to raise capital at higher valuations.
Conversely, the best investors build their own conviction before founders have concrete proof, allowing them to invest at lower prices. While this dynamic exists at every growth stage, pre-revenue investing involves the largest pool of assumptions, requiring a wider range of qualitative and quantitative inputs.
In the end, pre-revenue startup investing—like all venture capital—requires facing the future with a prepared mind, ready to embrace uncertainty. If you’re seeking the comfort of known quantities like established revenue, you might be in the wrong field altogether. After all, without uncertainty, there would be no venture capital.