How do you value a pre-revenue business?

Why £3m?

I get asked a lot about how to value a pre-revenue business.

In order to generate this it can help to think about how much Angel investors are looking to make from their initial investment. Realistically, it’s a 7 year time frame to exit. So at 35-40% pa (IRR) for the high equity risk, compounding for 7 years, that equates to c.10x their money.

Yes we’d all love a 100 bagger. But let’s assume 10x.

So, what is a “realistic” exit value? £30-40m? Maybe more. But that’s the negotiation!

So working back using a reverse compounding equation, assuming some dilution in future rounds, that gets you to around £3m for the entry valuation. I know this is very generic and clearly won't work for all businesses, but the approach isn't a bad one at least as a sense check of your aspirational valuation!