How to value a startup without any profit

Most ‘new to the market’ investors aren’t very keen on ‘companies’ that do not make any profit (yet). Imagine you have to ask someone who spends his life working for a non-profit organisation for advice on how to value a startup without any profit. The answer is: ‘There is no method’.

Often, this is how it is viewed: a company which doesn’t make profit is not a company. It’s an idea. However, people sometimes still invest in companies which haven’t made a single profit. It concerns mostly small sums of money (seed capital), usually around 50.000 euros. In this case, investors look at the founder(s)’s track record and the product’s or the service’s traction. But very often, there is no track record, nor is there a traction or a product.

Measure interests first, then develop the product

There is a way to solve this. A mistake a lot of start-ups make is seeking an investor to financially support their product development, whilst not knowing whether there is any public interest. What they must – and should be able to – do, is measuring the public interest before developing the product, which can be done with almost no costs.

Although testing the market before creating the product may sound like an illogical way to do this, it is the appropriate order (of actions) for a good entrepreneur. The internet allows us to offer potential customers products and services(parcels) before they actually exist. We can provide the products with different packaging, different colours, different designs, different prices and different warranty-offers.

Traffic can be generated via e.g. AdWords, Google-search traffic or via social media. Using analyse-tools such as Google Analytics, you can not only measure the public interest in a certain product, but also determine whether customers are actually willing to order the product. As the product doesn’t exist yet, customers won’t be able to actually spend any money.

You can measure anything for almost no costs

Measuring actual orders (the customer presses the ‘order’ button) is far better than just asking customers whether they would buy a product. This (asking) hasn’t ever worked, as in reality, they are likely to do it differently. Through the order button, you are able to measure the actual public interest.

You will also be able to measure what prices work out best, what way of selling works best, the way of packaging, the way of presenting, etc.

Apart from determining a successful offer proposition, you will also measure - using the same method - where your customers are from, how they found about the product and the amount of times the customers visited the website before ordering a product. For a good product, that should be about seven times.

Track Record without profit, turnover or costs

There are start-ups who ask: but how am I supposed to offer a product when I don’t even know what it is going to look like? The answer is: that doesn’t matter. Offer what you think the product will look like. If the shape is important; the customers will indicate what they want it to look like.

This is how it can be done and how you create a track record without profit, without turnover and with almost no costs, spending very little time too. This way, you will know whether a product will be successful and you are able to adjust things endlessly until your value proposition is sufficient, indicated by the customers’ purchasing habits. If you have all the necessary information, you can start looking for an investor.

Take all this in consideration next time you receive a pitch from a startup, good luck!