Traditional valuation metrics don’t capture the real value of an early-stage company because the cash flows are not yet in place. You must look at other aspects of the business.
TEN Capital’s Rule of 4 for startup valuations states that you give the startup a pre-money valuation as a sum of four parts: sales, team, product, and intellectual property. These are the foundational elements for building a business.
For each one, you decide how much is in the business today (not tomorrow) and assign a valuation from $0 to $3M. If the company has none of it, then it’s a 0. If the company has made some progress, you give it a valuation of up to $3M.
You then add up each of the four values to create a pre-money valuation for the company.
The most the company can achieve is $12M. Anything above this is pure speculation.
As the company achieves consistent cash flows, you can move to other valuation methods.