One of the most common questions in startup valuation is, “How do you value pre-revenue startups?” This question often assumes that startups are valued based on past revenue, but this isn’t the case. As Bill Gurley, general partner at Benchmark, once said, “Valuation isn’t an award for past behavior; it’s a hurdle for future behavior.”

Valuation is always forward-looking. Essentially, it’s about predicting future cash flows, or in the case of startups, understanding the potential for an exit. In venture capital, this typically involves assumptions about revenue growth or EBITDA projections.

The Roadmap for Valuing Pre-Revenue Startups

So, how do you value a pre-revenue startup? The process is the same for any startup at any stage: by mapping out its future potential. This can be broken down into three simple steps:

1. Ambition to Strategy: Start by transforming the startup’s ambition into a clear growth strategy. This will help define the likely growth rate and the investment needed to reach that potential.
2. Strategy to Financials: Next, translate the strategy into financials. This involves estimating future revenue, operational expenses (cost of running the business), and the cost of goods sold (the costs tied to each sale).
3. Financials to Ambition: Finally, compare the projected financials to the startup’s ambition. Does the financial forecast align with the startup’s goals? Is the plan realistic, or does it need adjustments?

This process provides coherence, not certainty. Startups are inherently risky, and pitching to investors requires them to suspend disbelief and consider the potential.

As Eric Bahn of Hustle Fund puts it, early-stage VCs should ask themselves, “What happens if everything goes right?”

Assumptions Along the Startup Journey

A startup’s path is full of key assumptions that evolve over time. Early on, one of the first proof points is revenue, showing the ability to attract paying customers. Then comes scaling — how easily and affordably that revenue can grow. After that, investors might look at customer retention data, the value of product expansion, and how competition impacts margins. At each step, confidence in the founding team is replaced by hard data on performance.

While a pre-revenue startup is high-risk, it’s simply one more assumption in a series of many. At this stage, the product is often expensive to build, and founders might not be able to bootstrap the launch.

To address this, founders and investors can explore other ways to validate the assumptions, such as speaking with potential customers, conducting technical due diligence, or performing market research.

Building Conviction in Pre-Revenue Startups

The best founders know how to build confidence among investors, often raising funds at higher valuations. On the flip side, top investors aim to build conviction before there’s solid proof, so they can invest at a lower price.

While this holds true at all stages, pre-revenue investing involves the highest number of assumptions. This means that investors must consider both qualitative and quantitative inputs when making decisions.