How do you value a business that has nothing to value? That is the challenge for pre-revenue ventures. They have no sales, and therefore certainly no cash flow, so how do you agree on a value that can be used to give equity in the business to investors that is fair to all parties? How do you assess a value to “potential”?
A common approach has been to basically postpone any valuation and issue convertible notes that allow early investors to convert from debt to equity when later stage investors come in once revenues start to flow. But even this method has flaws and pitfalls.
The latest collection of articles, tools and profiles from Kauffman’s eVenturing examines the issue of pre-revenue valuation. What is particularly valuable is that it looks at valuation from both the entrepreneur and investor side of the negotiation. Very good material for any high potential start up to review before entering into discussions with a VC or an angel.
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