Sure, valuing a startup prior to launch is quite difficult — even angel investors require an MVP (minimum viable product) which has, ideally, been experienced and tested by users.
It doesn’t matter if these users aren’t paying or may have only paid a small amount, what the investors are looking for is whether you can create and launch a viable product.
Venture Capitalists, on the other hand, require sales with significant growth.
So, how can you determine your valuation if you are pre-launch?
One method is through traction. If your product hasn’t been launched, then sales obviously aren’t available — but there are many different kinds of traction.
One way to demonstrate traction is through social media. Things like the number of social media followers you have in total and per channel, and what your interactions are like with your followers.
These numbers show enthusiasm for your brand — which you can leverage to enthusiasm for your launch.
Another type of traction, which is more applicable to enterprise SaaS sales, is the LOI, or Letter of Intent. In the LOI, the startup and the potential purchaser indicate their interest in entering a commercial relationship.
The startup has a product that the purchaser wants, and both sides have agreed on a set of conditions or terms.
The LOI may be binding — in which case both sides are obligated to perform certain actions by certain dates — or non-binding. Non-binding LOIs are more typical as they are a no-obligation expression of interest in your product.
LOIs also show that you know how to reach decision-makers in your industry and that you’ve built up a list of potential clients — which again will really help your launch be a success.
Other types of assets can also be really helpful at this stage.
Physical assets — machinery, real estate — are always useful as they can be easily valued according to standard metrics. But there are other types of assets that can help you as well.
For example, data, internal designs, and know-how can all potentially be sold as stand-alone assets or leveraged with consulting to sell as a valuable service.
As another example, having knowledge about a difficult tech problem such as autonomous navigation is itself valuable and, a competitive advantage.
Using an advanced technique or framework, such as the Kalman filter, is typically only available to a select few — your average startup won’t be able to apply such a valuable tool to problem-solving.
Emphasize the rarity of your abilities and available toolkit to investors — it’s one of your “unfair advantages” that can help you leapfrog over the competition!
But, don’t forget, the best way to leverage your assets is to protect them.
Using Intellectual Property (IP) protection such as patents, trademarks, and copyright is helpful to add real value to your idea. These are registered rights, so their existence and ownership (chain of title) can be proven.
Their big advantage is that they can be valued according to standard methods, and I’ll be sending you more information about this later!
In the meantime, if you have any questions, please book a free call with me. I’m always happy to help