Pre-money valuation is essentially how you value your business. It is the value you’ll quote to a potential venture capitalist or other funding sources to get funding for your business. The higher (and more accurate) your valuation, the better your capacity to attract funding.
All you need to do is mind the below factors before your next pitch to a potential investor.
Positive Factors
Traction– Does your company have customers?
Reputation – Does your startup owner have a track record of coming up with good ideas or running successful businesses?
Prototype – Does your company have a business prototype that displays how the product/service will help?
Revenues – It makes a company easier to value.
Supply and Demand – This includes a business owner’s desperation to secure an investment, and an investor’s willingness to pay a premium.
Distribution Channel – Where does a startup sell its product?
Hotness of Industry – If a particular industry is booming, investors are more likely to pay a premium and your startup will be worth more.
Negative Factors
Poor Industry – If a startup is in an industry that has recently shown poor performance, or maybe dying off.
Low Margins – Some startups will be in industries, or sell products that have low margins, making an investment less desirable.
Competition – Some industry sectors have a lot of competition or other businesses that have cornered the market. A startup that might be competing in this situation is likely to put off investors.
Weak management– If the management team of a startup has no track record or reputation, or key positions are missing.
Product – If the product doesn’t work, has no traction, and doesn’t seem to be popular or a good idea.
Desperation – If the business owner is seeking investment because they are close to running out of cash.
Ultimately, a combination of these factors as well as some of the other factors and industry-specific considerations determine the value of a startup.