DANGER: Watch Out for This When Valuing Your Pre-Revenue Company
Photo by Sharon McCutcheon on Unsplash
Rules of thumb for valuing your business, especially when getting funding from family and friends.
A good friend who is an entrepreneur and consultant asked me about things to think about when valuing your change-the-world company at the pre-revenue stage. To my mind, pre-revenue means your company is still mostly an idea with no tangible product as yet. You might have a price in mind and may have invested a little money to develop a prototype for your product, but you’re trying to raise money before you are making money.
Allow me to share what I’m seeing in the CPG world with respect to valuation — and especially the one big thing to watch out for.
In my case, I’m primarily seeing most of the valuations around $1 million on a SAFE note or rarely a convertible note. The higher valuation range I’m seeing is $2.5 — $3 million. But for those kinds of valuations, you’re going to have to be a proven entrepreneur who has “been there and done that,” perhaps someone with a unique technology or a unique product that would be very difficult to copy.
The other thing to consider when valuing your pre-revenue company involves the implications of raising money from family and friends. If you are pre-revenue, you most likely will raise money from those close to you — folks who are betting on you to succeed far more than your company. They may be willing to go “in on” you for considerably more than the $1 million or even $2 million valuation your company is worth.
The problem with this is if you’re an entrepreneur who has friends and family who are willing to give you an $8 million valuation, pre-revenue, you’ve basically just priced out any other strategic investors for a long time. So if you have to do another raise before your Series A or Series B (which I see in most cases), it’s unlikely an investor like me will come in at that high valuation downstream.
And so even though you can get a high valuation from friends and family, you should be very leery about taking it unless you believe that money can get you to the point where you could raise a $20 million valuation, in which case you’d have to be doing $500,000 a month in sales to attract next level investment.
My advice: raise the minimum amount of money needed on this first round to prove your concept with the least number of products on the least number of SKUs in the least number of channels. Taking this approach allows you to build a record of success on shelf, while managing your company responsibly and not biting off more than you can chew.
I have written more about the need to focus using the “minimum viable product” concept here.
Let me know what you’re doing in your company to focus like a laser on proving your concept for your change-the-world brand.
Sincerely,
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All credit to my ghostwriting partner, Dave Moore, who is instrumental in getting my thoughts out in a coherent manner & into these blogs. Thanks Dave!