How to estimate the valuation of a pre-revenue startup

Estimate a range from evidence, then test the terms.

This is an educational process for preparing a fundraising discussion. It does not determine an investment’s fair value, recommend an offer or provide a formal valuation for tax, accounting or a transaction. All Northstar examples and numbers below are fictional, and none are current market benchmarks.

1. Name the purpose, date and basis.

Write one sentence at the top of your worksheet: “We are preparing an indicative pre-money equity valuation discussion for a proposed primary financing, as of [date], in [currency].” Then state the security and capitalization assumptions. A priced preferred-share round, a SAFE cap, a common-share appraisal and the value of the whole business answer different questions.

In a simple priced round, post-money = pre-money + new primary investment. If you want to raise $2M while issuing 20% of the post-round equity, the implied post-money is $2M ÷ 20% = $10M and pre-money is $8M. That is ownership budgeting. It tells you the price consistent with your chosen terms, without proving that an investor will accept it or that the company is worth $8M.

Use the pre-money vs post-money guide to translate the basis and the founder dilution guide to trace the shares. List pools, converting instruments and secondary purchases separately.

2. Build an evidence file before choosing a number.

Use a short table with four columns: claim, dated evidence, remaining uncertainty and next test. An unsigned expression of interest is different from a signed pilot; a signed pilot is different from collected revenue. Record each at its actual strength.

For fictional Northstar Cloud, “three finance teams tested a prototype” would support a claim about initial product feedback. It would not support an annual recurring revenue claim. A valuation narrative should say what that evidence reduces, such as uncertainty about workflow usefulness, and what it leaves open, such as procurement and renewal.

Choose the next milestone that would change the discussion: an approved product, a paid deployment or repeat usage from an independent customer. Estimate the cost and timing to reach it, including the downside if it takes longer. Spending money on development alone does not establish an equal increase in value.

3. Choose methods that match the evidence you have.

Comparable financing terms and a scorecard.

Find recent companies with a similar business model, geography, stage and capital intensity. Record the closing date, currency, round amount, pre-money or post-money basis, primary versus secondary money, instrument and material rights. A funding announcement without its valuation or terms is not a usable valuation observation.

Bill Payne’s Scorecard methodology, revised in 2019, starts from comparable pre-revenue company valuations and adjusts for relative strengths and weaknesses. Its baseline and subjective adjustments need evidence. The historical dollar figures in that article are not present-day benchmarks.

A practical calculation is: supported comparable baseline × weighted relative factor. For example, a factor of 1.10 applied to a documented $5M pre-money baseline gives $5.5M. These two inputs are fictional arithmetic only. Without actual dated comparable terms, leave the baseline blank. A precise score cannot repair a missing baseline.

Milestone and risk assessment.

A milestone review asks which uncertainties have changed since the previous assessment. Dave Berkus’s own explanation organizes an early-stage assessment around the idea, prototype, management, relationships and rollout. He allows adaptations for business type and location. Use this as a prompt for evidence, rather than treating fixed dollars per category as universal prices.

One completed prototype can reduce technical risk while leaving regulatory approval or customer adoption unresolved. Avoid counting the same achievement in several categories and adding each as new value. For capital-intensive ventures, reflect the remaining funding and development path instead of copying a software scorecard.

Exit scenarios and cash-flow cross-checks.

The VC method below tests an investor’s price limit under assumed exit economics. A discounted cash-flow model can expose dependencies on launch timing, margins and cash needs, but uncertain forecasts need corroboration. IPEV notes the difficulty of reliable early-stage cash forecasts and discusses scenario and milestone approaches. See pages 44 to 46.

Do not apply a blanket multiple to nonexistent revenue. Multiplying zero current revenue by a revenue multiple is not an analysis of the company’s potential. Applying a multiple to forecast revenue is a different, conditional exercise: label the forecast period, achievement risk, multiple source, valuation date and equity-versus-enterprise-value basis. Neither a target market’s size nor a projected sales line supplies a valuation by itself.

4. Work backward from an illustrative exit.

Northstar is considering a $2M primary round. Assume $300M of equity proceeds available to shareholders at exit in five years, a 15× return on the investor’s initial check, and a 50% relative reduction in that investor’s ownership between this round and exit. These are invented teaching assumptions, not predicted outcomes or recommended targets.

Here, 50% future dilution means a 20% stake today becomes 10% at exit. It is a relative loss of this investor’s stake, not a statement that all future investors collectively own 50% of the company.

The resulting $8M pre-money is a conditional price limit for these assumptions. It is not an estimate of the probability that Northstar will achieve the exit. It ignores liquidation preferences, debt, taxes, transaction costs, later checks by this investor and interim distributions. We assume all equity participates proportionally at exit. If an exit source gives enterprise value, reconcile debt, cash and other claims before calling it shareholder equity proceeds.

The 15× figure is a total return multiple, not a 15% annual rate. In this single-check, single-payout example, 15× over five years implies about 71.9% annualized return: 15^(1/5) − 1. That is illustrative math, not a claim about investor requirements. With a fixed multiple, changing years alone does not change this price formula.

At a $20M exit, the original $30M required payout exceeds the entire equity proceeds. The assumptions cannot support the investment, even before dilution. Treat that as an incompatible scenario, rather than making the spreadsheet produce a negative company value.

Preferences and conversion can change who receives the proceeds. Read the liquidation preference guide and SAFE cap and discount guide before applying this proportional model to actual terms.

Test the assumptions, then keep the working.

This public calculator runs in your browser without an account or a save action. Enter amounts in USD millions. Its defaults reproduce the fictional base case above. It calculates the conditional VC method limit only, with the same exclusions.

The worksheet keeps comparable terms, evidence, assumptions and ownership budgeting separate. If methods disagree, identify the missing evidence or inconsistent basis. Do not average their outputs mechanically: a desired price, an unsupported score and an optimistic exit can all share the same unsupported assumption.

Use ValuLab for a simple revenue planning range.

ValuLab now uses Revenue Multiple only. Enter total revenue expected over the next 12 months if funded today, review the suggested multiples and go directly to the planning range.

For a marketplace, enter only fees retained. A forecast is a conditional assumption; support it with customers, a sales pipeline and an operating plan. Some specialist business models have no suggested multiple and need credible comparable inputs.

The range midpoint is arithmetic, not a recommended asking price. Results, named scenarios and PDF reports retain account and plan requirements. Older saved scenarios keep their original outputs.

The exit worksheet above is a separate educational illustration. It is not a step in the current ValuLab calculator or Learn flow.

Review the ValuLab overview or open the revenue calculator to explore your own revenue assumptions.

Before sharing a discussion range.

Keep this note beside the deck and model. Copy it into your working document or download the Word document.

PURPOSE / DATE / CURRENCY: State the question and as-of date.
SECURITY / BASIS: State pre-money or post-money and capitalization.
PROVEN EVIDENCE: Link dated product, customer and team evidence.
OPEN RISKS: Name missing evidence and the next milestone.
COMPARABLE TERMS: Record source, date, instrument, rights and exclusions.
FORECASTS: Separate projected revenue from actual revenue.
SCENARIOS: Record exit equity, return, ownership loss and sensitivity.
ROUND BUDGET: Separate required cash and desired ownership from value.
RANGE: Explain support, disagreements and what would change it.
REVIEW: Reconcile pools, conversions, preferences and model version.

If the evidence does not support a reliable range, say what remains unknown. Bring a dated evidence file, a milestone budget and conditional scenarios to the discussion. A visibly incomplete estimate is more useful than false precision.

Common questions