Running a DCF on a pre-revenue startup is theatre. You are discounting cash flows that do not exist, using a discount rate you cannot defend, for a terminal value that relies on year-5 projections nobody believes. Investors know this. So what do you use instead?
The Berkus Method
Developed by Dave Berkus, this method values pre-revenue companies using five qualitative factors, each worth up to $500K-$1.6M depending on the market:
- Sound idea - Is the problem real and the solution logical?
- Prototype - Does a working product exist?
- Quality team - Does the founding team have the skills and track record?
- Strategic relationships - Are there partnerships, LOIs, or early customers?
- Product rollout or sales - Any revenue at all, even pilot revenue?
Maximum pre-revenue valuation under this method: approximately $8M for a perfect score across all five factors. This anchors founder expectations to reality.
The Venture Capital Method
Work backwards from a target exit. If comparable companies in your sector exit at 8x revenue, and your Year 5 revenue projection is $20M, your exit value is $160M. An investor targeting 10x returns on a Series A needs to buy in at $16M post-money. Subtract the investment amount for pre-money.
This method is transparent, simple, and directly tied to the investor's return expectations. It also forces founders to justify their revenue projections with evidence, not hope.
The Scorecard Method
Take the average pre-money valuation for seed-stage companies in your region and adjust up or down based on qualitative factors: team (0-150%), market size (0-150%), product stage (0-150%), competitive environment (0-150%).
We typically combine two or three methods and present a valuation range. Investors respect this approach because it shows discipline, not delusion.