Startup Founder Lessons: How To Do Pre-valuation of An Early-stage Startup

There is no one true way, you pretty much have to triangulate it from various standpoints and to get a feel and better understand it yourself.

Market Value. Currently it doesn’t have any value besides what someone is are prepared to pay for it.

If someone likes the idea and is prepared to back you then you will need to be able to pay for 1.5 to 2 years with 3-4 people being paid $X each say $80,000. But you will need sales and marketing and advertising and hosting costs and … the list goes on.

For your specific case work out what these costs are likely to be over a 2 year period to achieve a nominated and realistic goal: 1000 clients in 2 years … beak that down into clients per month and then per week and you soon realize its a real number.

Have the income spreadsheet with each client coming on paying $X per month for the product. Have the outgoings per person per month on the other spreadsheet.

The third spreadsheet is Amount needed = SUM(Income – Costs) for 2 years.

So you have the first metric.

Effort so far. You can give it a value by calculating the amount of hours each of you have put in (say 200 each) and saying what job could you have been paid for with those 200 hours. Hourly rate of say $30 per hour.

So 600 * $30 per hour gives you your direct “opportunity cost”. You then put a multiplier on this like x3 or x4 to say the value now created could be purchased outright for 600 * $30 * 4 and that would be a reasonable 100% buy out price if we didn’t have to do anything on it ever again. This is your baseline sort of metric

The potential metric. The next metric is the “potential” metric otherwise known as the marketing BS metric.

• You say “how big is the total potential market” say 20,000,000 users
• then you say “how much of that market as a potential can we hope to get in 2-5 years”. We think upper limit would be 20% of this.
• What is the value of that at our Saas rate per month ongoing for the 5 years. $20 per month * 20% of the market = $LOTS and early retirement for all.

This gives you your upper bound number that you can present as the carrot to VCs and other investors “with your help we could hit this” is pretty much the statement you want to make.

You then have to do the sanity check of how many clients per month would have to sign up to our Saas to make that happen and the answer is bucket loads … if you can then answer the question “How do we consistently get bucket loads a month signing up and continually paying” … go for your life you will get backers.

In summary

This gives you a high, medium and low point to start working from when costing the company … really at an alpha stage its worth nothing until people start to sign on.

You should run through the above scenarios, especially the first one as it is the most realistic set of numbers you will need when hunting for your first round of investment.

Your effort so far justifys your shareholding in the company (totaling around 70% to start with) giving 30% away to investors which aim to cover you for scenario 1 for around 2 years.