Pre-Revenue Business Valuation Example

Pre-revenue business valuations present unique challenges to investors managing risk and founders managing funding rounds. Consider this example suppose a company is developing a new software application that is intended to be sold to small businesses. The company has not yet started generating revenue, but it has a well-defined business plan and a strong team of experienced software developers. The company's management believes that the software has the potential to generate significant revenue in the future.

To value the company, an analyst might use the comparable company analysis method. This involves finding other software companies that are similar in size, stage of development, and target market, and using their revenue or valuation as a benchmark for the pre-revenue company.

For example, suppose the analyst finds three comparable companies that are generating revenue of $5 million, $10 million, and $15 million per year. Using these benchmarks, the analyst might estimate that the pre-revenue company could be worth between $5 million and $15 million, depending on how closely the company's business model and market opportunity match those of the comparable companies.

Note that this is just one example of how a pre-revenue business valuation might be performed, and the actual value of the company could be higher or lower depending on a variety of factors. Pre-revenue business valuations are highly subjective and can vary widely, so it is important to seek the guidance of a professional valuation expert when performing a valuation.