Pre-seed investment: How is a company valued?

Johnny828

What are some of the methods that investors use to value a company during the pre seed and seed investment stages? How do these methods differ from the methods used to value a company during later stages of investment?

goldenbird791

Pre-seed investments are typically made when a company is in its earliest stages of development, and investors are drawn by the potential future value of the company. Understanding how to value a pre-seed investment can be difficult and complex, so here are some common methods to factor in when evaluating a potential pre-seed investment:

The Team: One of the most important aspects of a pre-seed investment is the team behind the project. The team should have a proven, successful track record and all team members should have experience relevant to the proposed venture.
Product: The product should be proven or have real potential for success based on the market and feedback from potential customers. Investors are looking for something that can solve a pain point or offer a service or product that is not currently available.
Intellectual Property: This can range from the original idea behind your product, the design and technology used, or the patents and copyrights associated with your product. Intellectual property is valuable to investors and can help provide your business with added protections and legal rights.
Market Opportunity: Your venture should address a real need in the market, and the potential opportunity should be evidenced by real data and research. Investors want to know that your venture is addressing a real need and has a market that potential customers are willing to purchase from.
Revenue Potential: Investors want to know that they will get a return on their investment. Evaluating the future revenue potential of your company can be difficult to do, especially when the company is in its early stages. However, investors will be looking for past evidence of success, realistic market projections, and projected performance for the next few years.

The pre-seed investment process is complex and it’s important to be aware of all the variables. Above all, make sure that your business plan is well thought out, that you have a solid team, and that your concept is backed by real data and market research.

blueleopard

Pre-seed investments are usually given to companies that have not yet developed a product, often even before a founding team has started working full time. As such, valuation during pre-seed investments is much more of an art than a science.

Here are some general points to remember when it comes to pre-seed valuations:

Valuations are based on the stage of the company. Pre-seed valuations are significantly lower than those of later stages, such as Series A, B, and C, because they involve more risk.
Valuations can be higher if the company shows a lot of potential and has strong metrics. These can include traction, a skilled team, well-defined product-market fit, a solid business plan and an experienced advisory team.
Angel investors and venture capitalists also consider the size of the market that the company is targeting. Generally, bigger markets mean higher valuations.
Valuations may be higher if investors feel like they have bargaining power. They may also offer more for a larger ownership stake in the company.
Valuations can be impacted by external factors such as market conditions, sector trends, investor sentiment etc.

Pre-seed valuations are ultimately determined on a case-by-case basis. Much needs to be taken into consideration, such as the specific stage of the company, its potential, the size of the market, the skills and experience of the team, and the level of bargaining power available to the investors.

For more information, refer to this helpful guide:
https://blogs.bmc.com/2020/04/06/how-to-calculate-a-pre-seed-startup-valuation/