What are some of the common valuation methods for early-stage startups that have no or minimal revenue?

This is the first method anyone tries but it is also not very informative because the data that you need does not exist in most cases. Most private companies do not share their revenue, and they most likely will not share their valuation. The same applies when acquisition happens. Even if the acquirer is a public company most of the time it is difficult to know what was the acquisition price since they do not need to separately report each acquisitive activity.

The market approach involves comparing your startup to similar companies in the market that have recently received funding. In our case, we scoured the fashion-tech industry for companies that were in their early stages and had secured investments. By analyzing their valuations, we could present a more grounded estimate of Jopiter's value. However, finding truly comparable companies can be challenging, and this method may not always yield accurate results.

The cost approach determines the value of a startup by calculating the cost of building the business from scratch. This method involves tallying up expenses, including research and development, marketing, and operational costs. For Jopiter, this method helped justify our valuation by highlighting the investments already made in product development and market research.

In my experience with healthcare startups where R&D is capital intensive, this method may not fully capture the startup's comprehensive value due to its limited scope as it does not take into account various market and operational risk factors. For example, it tends to overlook market-related risks, such as changes in customer demand or competitive dynamics that could devalue the startup's assets. Moreover, the cost approach may overvalue the company by ignoring broader economic risks like market volatility or regulatory changes that can affect the startup’s future.

While early-stage startups often lack significant revenue, the income approach considers projected future earnings. We had to create detailed financial forecasts, outlining our revenue projections, growth rates, and potential market share. Investors were interested in our long-term vision, and this method allowed us to showcase our growth potential. However, these projections can be speculative, and it's crucial to be transparent about the assumptions made.

We use key performance indicators (KPIs) to measure our progress towards each goal and we review our scorecard on a monthly basis to evaluate our performance and adjust our actions accordingly. By using a scorecard approach, we are able to align our activities with our vision and goals, measure and monitor our performance, and communicate our progress to our stakeholders.

While early-stage startup will struggle to find their way around Venture Capital Method, we preferred to go with a much better method, which is the SAFE method. Startups struggling to pin down a valuation, convertible notes or Simple Agreement for Future Equity (SAFE) agreements can be a flexible solution. These instruments allow startups to raise capital without setting a fixed valuation until a future funding round, providing more time to prove the business concept.

Early stage startups are extremely difficult and close to impossible to value. In my experience you sit across the table and negotiate to get to a number you both agree on- without much of logical or mathematical basis to it, atleast that is how it goes pre series A.

Look for comparable companies, both at your own stage or at a later stage, pair that with your go to market and business plan, taking into account both the optimistic and pessimistic forecasts, and choose a valuation that reflects your potential, while still making the round interesting enough in potential ROIC to raise funding.

Valuing an early-stage startups are undoubtedly challenging, but it wasn't insurmountable. Through a combination of thorough market research, transparent financial projections, and a compelling story, we should be able to navigate the valuation maze and secure funding for our vision. Every startup's journey is unique, and there is no one-size-fits-all approach to valuation. It's essential to tailor your valuation method to your specific circumstances and be prepared to defend your valuation to potential investors. With determination, a clear vision, and a well-thought-out valuation strategy, you can overcome the challenges of securing funding for your early-stage startup and turn your vision into a reality.