Establishing Valuation Before Revenue Traction

establishing valuation

Once you have a product in the market with an increasing number of paying customers, your valuation will increasingly be driven based on financial and operational metrics.  Don’t get me wrong, establishing a financial valuation for any early stage company is part art and part science.  So it is true that things like meaningful strategic partnerships, a robust product roadmap, and other non-financial items can help drive valuation.  But the more you have an established track record of revenue/profit, the more your valuation is based on financial and operational results.  What about establishing and boosting your suggested valuation before you have revenue traction?  Let’s explore.

Establishing Valuation

The stage before product launch and revenue traction is where the subjective aspect of valuation comes into serious play.  This is the “art” part of the equation.  And if you raise your seed round as an equity round (ie – a priced round at a stated valuation), establishing a fair but reasonably high valuation is very helpful for dilution reasons.  Actually, even if you plan to raise your seed round on a convertible note, you should pay attention to things that drive valuation – implied or real.

Note:  Remember that most convertible notes include a term called the “valuation cap” (see related article titled “Convertible Note Basics“).  Although the valuation amount stated in the cap is as much a protection mechanism for investors (see related article titled “Justifying the Cap Amount in Your Convertible Note“) as it is a suggestion of your current valuation, if you accomplish subjective milestones now you can set that valuation cap higher than otherwise possible.  And that can really benefit you later when the note converts.

Defending your suggested valuation before having revenue traction comes from outcomes or accomplishments that either reduce risk, boost odds of success or raise the bar on what a potential home run exit could look like.  I use the term “implied valuation” because during the pre-launch phase most startups haven’t formally been valued.

Here’s another way to think about it.  All of the ideas in this article accomplish one or more of the things listed immediately below.  Use these categories to see if you can think of additional ideas that might be unique to your business/offering.

  • Validate something
  • Accomplish something
  • De-risk something

Progressive Steps that Lead to Customer Revenue

There are several milestones you can strive for before you’re actually ready to collect money from paying customers.  Here’s a sequence that starts from as early as your idea phase:

  • Expressions of Interest – Get some number of meaningful prospects in your target market to say they would be interested (willing is better) to evaluate your product once ready.
    • B2B companies – Get interested prospects to show their interest by signing a Beta Test Agreement.  The agreement doesn’t obligate them to purchase and actually doesn’t force them to actually start a beta test but rather just demonstrates their seriousness about an evaluation as soon as the product is ready.  To motivate the prospect to sign this agreement, tell them you’re only allowing a handful of companies to participate in your initial beta test.  And if you can’t get a formal agreement, at least try for an email acknowledgment.  Anything to evidence genuine interest.
    • B2C companies – Encourage interested parties to give you their email address to be notified once your beta version is available.  Do this by adding a simple form on your website.  Get as many as possible and even do some social media campaigns to try and drive your target audience to this page of your website
  • Beta Tests – Start live beta tests with real prospects in your target segment
  • Conditional Orders
    • B2B companies – Ask your best beta test customers to give you a conditional purchase order that says once the product is commercially available and successfully does A, B and C, they will purchase it for $xxx.  You can agree to whatever wording they want to add to the conditional PO so they can wiggle out, if needed.  The important thing is to show a serious intent to purchase.
    • B2C companies – See if you can get pre-orders and offer a very special price, if needed, to get these orders.  In fact, you might be eligible to run a crowfunding campaign (ie – Kickstarter, Indiegogo, RocketHub, etc) to see if you can get pre-orders for your product.  These crowdfunding platforms aren’t appropriate for all types of products, so make sure to do your research first.  But what better validation could you get than actual pre-orders from real customers?

Progressive Milestones to a Real Product

Eventually you’ll have a commercially viable product that you charge money for.  Until then, make sure your investor prospects know as you progress through these milestone phases:

  • Book cover - Lean StartupDesign Specification – You’ve gone beyond the chicken scratch on a napkin and now have a product specification that describes the architecture and key elements of the user experience.  The more complete the design, the more credible you are to investors because you show you’re not just going to make things up as you go.  Just don’t go too crazy and violate solid Lean Startup principles.
  • Working Prototype – At this phase you can prove one or more of your product claims in a lab or other controlled environment
  • Beta Test Product – Something you would actually be willing to have a prospective customer test
  • AppStore Acceptance – Obviously this is for mobile apps but just getting through the review and acceptance process for the various app stores provides some validation.


Who can you get to state something publicly or in writing to become a source of validation?  Here are some ideas:

  • Beta Customers – If they like things about the product, get it in writing or get them to post to one or more of their social media channels
  • Industry Analysts, Pundits and Bloggers – Who are the trusted sources of information in your target industry or solution segment?  Fully disclose your plans and current progress to them, then ask if they would be willing to write what they think.  But be a little careful about this one because if they don’t like your product or don’t think you’ll be successful, they could write that in a blog or on their social media channels and you can’t do much about it.  So better to first brief them somewhat confidentially while feeling them out for their impression.  Also, the truth is they probably wouldn’t waste the time to write something negative about a pre-launch idea they don’t believe in.

Incubator & Accelerator Programs

Many of these programs have far more applicants than are formally accepted.  If you’ve been selected and are participating in an incubator or accelerator program, tout it as external validation and, therefore, a valuation driver.

Founders with Credentials

If one of more of your company founders have relevant experience in your chosen industry or product segment, leverage it.  Same if they’ve previously built a successful company, especially if that company provided a nice return to investors via an exit (ie – acquisition or IPO).

Employees at Below-Market Compensation

Can you convince people to work for you, either full time or part time, at significantly less than market-rate cash compensation?  The most dramatic evidence comes from those that agree to work for free (equity-only) but you’ll get validation credit up to about half market-rate because anything in this range demonstrates that others buy into your vision and potential enough to make a near-term cash compensation sacrifice.  It also shows that the founders are able to sufficiently communicate the vision and potential.

Company Advisors

Getting one or more well-known advisors with a successful and/or relevant experience is evidence that they believe in your strategy and vision.  This lends credibility to your company and, therefore, helps drive implied valuation.  For information about how to select, compensate and maximize value from advisors, see my related articles here: Selecting, Compensating, Maximizing Value

Investors with Credentials

If you’ve already raised money from investors that are well-known or have meaningful credentials in your market space, use it as a valuation driver.

On a related note, being awarded a grant from a reputable institution has similar value.  The more reputable and more relevant to the industry you serve the better.

Prospective Partnerships

Is there a complementary vendor that you’d like to integrate with to tap into their customer base and offer a more comprehensive solution?  What about a distribution channel partner that you’d love to have selling your product?  Just like the idea above to get prospective customers to formally express their interest in testing your product or buying it once it’s available, do the same with prospective partners.  If you can get them to sign a Letter of Intent (LOI), even better.

Business Plan

There are debates as to the value of even writing a business plan (see related article titled “Don’t Waste Time on a Business Plan” Doesn’t Mean Don’t Plan).  So without suggesting how long, inclusive or detailed your plans should be, I’ll just say that companies that can demonstrate they have a good handle on the following aspects of their expected business can drive higher implied valuation:

  • Market Size and Projected Growth – including segmentation for the subset of the industry you are most focused on.
  • Business Model – You want to have thought through how you plan to make money.  You’ll validate it later once that’s possible but show that you’ve thought through a primary and alternate approach.
  • Customer Acquisition Strategy – How do you plan to attract prospects and then convert them to paying customers?  Get specific where you can.  You’ll validate all this later but show that you’ve thought it through.
  • Competition and Unfair Advantage – Show that you know the competitive landscape and how you’ll win against them.  Even just having a competitive landscape for your idea shows legitimacy, assuming you can differentiate yourself somehow.  Again, get specific where you can.
  • Financial Model – It’s less important what the numbers show and more important that you’ve figured out the “knobs and levers” that will drive your revenue production and eventual company profitability.

Press Coverage

It’s almost crazy, but true, how some investors are positively influenced by coverage you receive from press of any kind – local/national, print/online, owned/earned

Awards & Recognition

Have you won any pitch competitions?  Have you gotten any public recognition of any kind that has an official status associate with it?  If not too burdensome, seek these out and add them to your collection of valuation drivers.

Negotiating Valuation with Investors

This article is mostly focused on the things you can do to serve as a basis for valuation, especially before you have revenue traction.  Debating and negotiating your desired valuation with investors is such a big topic by itself that I wrote an article specifically focused on that:  see “Negotiating Valuation with Investors“.

A Real-Life Example

Just this past week I was debating valuation with a pre-revenue startup and their responses to my “how are you possibly worth that much now?” question were brilliant.  See below and imagine my reaction.

  • “Two of our early beta users decided to invest their own money ($25K and $40K respectively).  One has already committed to invest in our next round.”
  • “Our lead investor has invested in both of our funding rounds”
  • “10 of our beta users have asked us how they can help us spread the word to others to make sure our solution doesn’t go away”
  • “We convinced two A players to quit their jobs and work for us at significantly reduced compensation.”
  • “We convinced _____ (big company) to let us into their program without having to pay the required fee because we blew away the results they’ve seen with any existing partner”


Hopefully the ideas mentioned in this article expand your range of thoughts about things that can drive implied valuation before you have real revenue from paying customers.  Which of these things, or things like them, could and should be a part of your business plan and near term objectives?  Don’t do anything that’s not consistent with your strategy or long-term vision.  But keep at least some focus on things that will boost your pre-revenue valuation and clearly communicate them to investor prospects to put you in the best position to minimize founder dilution – regardless of which fundraising instrument you decide to use.

Don’t binge read my whole blog, just order the book!!!

Dramatically improve your odds of fundraising success by reading my bestselling book titled Startup Success: Funding the Early Stages. It leverages my knowledge from making more than 300 early stage investments and from raising more than $80M in private and venture capital.

Learn More

“Startup Success is so actionable that I immediately started applying the concepts as I read. After reading the book, I now have a plan of attack with a very high level of confidence and certainty.” (Ramon Berrios, CEO, Trend)

“Whether you’re a first-time founder or have already raised millions from VCs, Startup Success is a book you want close by before hitting the fundraising trail!” (Andy O’Hara, Founder & CEO, Chiron Health)

Want Notifications When I Post New Material?

Either select the preferred method on the top-right side of this page or complete the form below.