The talk of pre-money valuation comes up every time a company lines up for external funding. Let's look specifically at the first external infusion that a startup seeks and understand pre-money and post-money valuation, in that scenario.
As part of routine assessment, investors may ask for a financial projection over couple of years. However, for a startup which is in pre-revenue stage, the valuation is never done on the basis of such projection of it's potential earnings. The projections help to understand roughly, the range of revenue expected and to compare and validate it, with that of similar companies.
The valuation instead, is based on the extent of fund sought to be raised by a startup. It has pretty little to do with what the start up has incurred so far or what the start up could generate as revenue. As such, at the early stage, the value of a company can be taken as close to zero. But Pre-money valuation is not!
You are "bootstrapping" when you are fueling your project with own resources together with any early stage customer revenue. So what are the 10 big reasons that drive founders to bootstrap?
Avoid distraction. Bootstrapping helps you to avoid the distraction of fund raising and focus on what you are good at; developing concept, into a product! Running behind investors at early stage, could cripple & delay the progress of product development.
Faster release. Startups tend to reach release milestones faster, when bootstrapping. The fact that funds are limited and need to hit the market sooner, pushes the team to work more efficiently and produce product versions that can be tested in the market.
Less complex, lean and smarter. The stories of fancy startup ideas, funded to the teeth, falling by the way side, are well documented. With assured funding, entrepreneurs tend to work on a more complex product, even before the concept is tested in the market. Bootstrapping always results in lean, mean early versions, which can be developed further, based on customer feedback
Non interference. You won't have investors breathing down your throat which could be a major turn off for many. You will have creative freedom and be able to tweak the product, based on your understanding of the customer pain points
Quality control. Bootstrapping would demand splitting product features into incremental targets with testing and debugging at each level. No entrepreneur would want to take risk with his own money and would be prudent in establishing quality.
Product invisibility before launch. Startups bootstrapping their projects have the power to keep the idea under wraps till they are ready to face the wide, wild, world! You can go ahead and do extensive publicity when you are ready to launch and that will definitely by a winning strategy against copycats.
Know the market better. The founders will be actively involved in early sales and would get direct feedback which helps to know the market better and tweak the product offerings. They would be in a stronger position, to design a successful marketing & sales strategy and drive the future sales team to success.
Learn to be financially disciplined. Bootstrapping would bring in financial discipline, since there is no excess funds to play with. The founders learn to be careful with deployable resources. This wisdom acquired during the bootstrapping phase, will help the company in the long run to face & overcome future challenges.
Get larger valuation and hold better stake. After bootstrapping and using customer receipts for further development, a time would come when you would want to scale up. A proven product with paying customers, will help founders to raise funds easily and they would find themselves in the driving seat, holding much larger stake at higher valuation, than any other enterprise, funded in early stage.
Be able to take a practical call, on when to seek funding. Unless the bootstrapped project is able to sustain and scale up, on the basis of customer revenues and possible debt funding, it would have to seek equity infusion, one day or the other. Entrepreneurs bootstrapping their projects are in a better position to know the right time, to seek external funding and get the best possible terms, since early stage risks are mitigated. They would have tested and released the first version to customers and received feedback. They have clarity on the further course of development and would be able to project the market potential, better.