Understanding Pre-Money Valuation
November 8, 2022
Startup valuations refer to the calculation of a startup's worth at a given time. It is the process of determining the present value of the company. A pre-money valuation typically refers to the value of a company before the company fundraises (receives external funding or financing).
Investors usually want to know the value of a company before investing. For mature businesses, the business valuation usually details hard facts and figures that are driven by the stream of revenue of the businesses. The valuation calculation of pre-revenue businesses on the other hand is a bit challenging as there are no figures or data to back up.
For valuation, pre-revenue investors often prefer a lower value that promises a higher return on investment (ROI). For startups in Africa especially at the pre-money stage, getting valuation done right is highly important.
Key factors to consider for a pre-money valuation
Team Value
A pre-money investor will be highly concerned about the value of the founding team and if they are positioned to lead the business to success. They look out for factors such as the team’s commitment to the business or project, their dedication and personal interest or investment in what is being built. Investors also want to know what their wealth of experience is. Have they built something before or at least worked on similar projects that can prove their experience in the field? Do they have a background in the field? Do they understand the market properly and how to run a business? Do they have the required skills needed to help the business grow? These are important questions that need to be answered to help build the valuation.
Business Traction
Since the business hasn’t yielded any revenue, a key factor to consider is the traction of the business so far. For a SAAS business, metrics such as the total number of users become important for the business valuation. How has the business been able to grow despite the little funding so far? What’s the growth rate of the business in terms of hard data? What is the cost of acquisition of a customer using the product? Is the business spending less money to acquire users? The responses to these questions help show proof that it’s a viable business that is being built
MVP
An MVP refers to a minimum viable product, that is, a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development. A startup that has an MVP gives investors confidence that the team can turn ideas into a reality thus helping with the valuation of the business.
Business Market & Trends
Some startups at the pre-money stage have a higher valuation than others due to the business market they operate in. For example, tech-focused startups in an African market usually have a higher valuation since it is a relatively growing industry. Products based on concepts such as Artificial Intelligence (AI), Gaming, DeFi, etc fall into these categories. Another market concept to consider is the customer demand for the product. Products with a higher customer demand are typically valued higher as this might mean that the growth will be higher.
Raise Valuation Methodologies
At Raise, we help deliver pre-money valuations to help understand your company’s performance in the African market. With our three (3) different perspectives, we have five (5) Valuation methods that help you analyze the business and give you a comprehensive & reliable view.
Future Cash Flows methods: These are the standard and most traditional methods that measure the company's value according to the money generated in the future.
DCF with long-term growth
DCF with Multiple
Investors Returns: This method considers the returns the investors expect to earn upon exit to have a profitable portfolio.
Venture Capital Method.
Qualitative Aspects: This method values the element of the company that guarantees future success in the pre-revenues, early-stage companies
Scorecard Method
Checklist Method
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