Pre-money valuation for an early-stage startup

I spent much of my early adult life studying physics and engineering. These fields build on a series of assumptions you can verify and chain to each other backwards and forward.

For example, a few equations (Maxwell's and Lorentz force) can derive everything we know about all classical electromagnetism, classical optics, and electric circuits. This approach is typical of "technical truths": there are a few empirically validated principles at the core, and the results can be logically derived, verified, and are valid for everyone.

Soon enough, when running a startup, every technical founder comes to terms with another sort of truth, namely "social truth". These truths are characterised by not having any intrinsic value. Their value depends on the beliefs of a group of people; in other words, it is socially constructed, and there is no unique and verifiable answer. Best example? Financial assets or, even more specifically, the valuation of an early-stage startup. How do you define the valuation of a company when you cannot rely on a multiplier of revenue? The same model that can be used for a bakery cannot be used for a pre-seed startup.

As technical founders, we have trained our brains in a way that could be almost counter-productive when shifting from technical to social truths. (and that's why it is so important to keep a broad range of interests, even not technical).

The core idea is to identify ways to construct value in the company based on the preference of the investors you believe can benefit your company and tightly coupled to a path forward.

Here are some questions that might help:

• Why do you need money right now? How would funding impact the success of your company?
• How can money raised now help you raise money in the future? Which milestones could you achieve, and why are they essential for unlocking the next fundraising step (or getting you to break even)?
• If everything goes right for five years, how is your company doing? What have you achieved? Which investors and funding you raised when to help you along the way?
• How is funding impacting your chances to thrive in your specific market? For example, are you working in a highly competitive market where land grabbing is key to survival? In that case, you should rule out bootstrapping.
• Early-stage funding is high risk. How could you help your investors de-risking their bet on your company? Are you looking at domain knowledge, direct sales impact, etc.?

If you are raising your first round and want to test your assumptions with me, reach out! I'll put topics and takeaways in follow-up posts so that they can help other fellow founders in the future.