How Pre-Revenue Startups Can Raise Funds

What does pre-revenue mean? It actually means that your startup hasn’t earned any revenue (for now). 

But somehow, for many founders, especially if they are first-time founders, pre-revenue sounds like “We are not ready for fundraising” and “We won’t get a fair valuation of a startup.” 

In this article, we’re going to debunk these two common myths and show that your pre-revenue startup has all the chances to get a desired check from investors. We’ll speak about what pre-revenue is, how to value a startup company with no revenue, and, most importantly, where and how to raise funding for your pre-revenue startup. 

Let’s dive in!

What does pre revenue mean?

The meaning of a pre revenue startup is quite simple—a startup that hasn’t started making any money yet. Actually, your company can be anywhere from having just come up with a cool business idea to having built an MVP (minimum viable product) and put it in front of customers. 

Some founders confuse what pre revenue is and what it’s not. Let’s have a closer look at these misconceptions: 

❗Pre-revenue means you have no traction.

Even if you haven’t started generating any income yet, you can still have early customers, positive feedback, product tests with customers, etc. That said, you can be pre-revenue and have traction. 

❗Pre-revenue startups don’t always have a product.

Some startups may be at the point of only having a business idea. But mostly, you already have a prototype or an MVP, but it just hasn’t reached full market launch and started bringing your money. In both cases, you’ll be considered pre-revenue, as neither the first nor second variant brings you income. 

❗Pre-revenue startups can’t raise funds. 

They can if there’s potential, a cool team, and a promising market opportunity. Investors might give you cash based on your qualitative data—vision/mission, team, market potential, etc.—even if you don’t have solid quantitative data yet. 

Numbers interest VCs and angel investors, but they, of course, understand that pre-seed and seed funding is risky, as the company may not have solid KPIs to show right now. And they are ready to take this risk and give you pre-revenue startup funding if they see potential for your business and their future returns. 

❗Pre-revenue means no valuation of a startup.

Pre-revenue startups can be valued. Just since these companies don’t have traditional financial metrics like revenue or profit to rely on, investors may take a different path when thinking about how to evaluate a startup for investment. As mentioned above, VCs and angels look at qualitative aspects and assumptions to get its value (more detail on this in the next part).

What is startup valuation, and is it really so important for fundraising?

Many founders believe that the higher the valuation, the better. If your company gets a more significant price tag, this means investors are more confident in you, you can secure a stronger foothold in the market, and your idea/business is really appreciated. Higher valuation also lets you give away less equity, stay in more control over your company, and be more capable of successfully winning further rounds. 

Sounds like the valuation of a startup is the king of the whole fundraising process.  

But is this really so? And what do investors really think about valuation, especially of a pre-revenue startup?

Ron Conway once said, “I will not talk to an entrepreneur about valuations for more than five minutes. If they want to talk more than five minutes, I probably do not want to invest.”

Of course, this famous angel investor doesn’t mean that you don’t have to talk about valuation at all. But what does he mean then?

We’ll dig deeper, but first, let’s start with the basics—what is the valuation of a startup?

Startup valuation means how much money a company is worth at a given point in time. Typically, established businesses are valued based on their performance indicators like revenue, cash flow, and profit. 

But in the world of pre-revenue startups, valuation goes around:

• Qualitative data like the team, idea’s potential, mission/vision, and exit strategy.

• Quantitative data like market potential (TAM/SAM/SOM), business model, GTM strategy, traction (if there’s any), financial models and forecasts, balance sheet, and growth to date.

VCs and angels check the experience and expertise of your team, the size and the growth potential of the market, the stage of your product development, product-market fit, your competitive moat, evidence of early traction, and financial projections. 

Sometimes, investors may focus more on qualitative aspects, especially if you don’t have much quantitative data to show. 

When talking about valuation with the investors, founders typically do this in terms of pre money vs post money valuation.

But what is pre-money valuation? 

Pre-money valuation is how much your company is worth before the investment. Respectively, post-money valuation is the value of your company after the investment. 

Once we’re done with the basics, let’s get back to Ron Conway’s quote and the importance of valuation for the founder-investor relationship. 

Of course, the valuation of a startup is important, as it really gives many perks to a founder and investors, but only if it’s realistic (not underestimated or overly inflated) and well-negotiated. 

Here’s the recent data on median pre-money valuation across different stages:

As a startup, you might think that your idea is worth millions of dollars, but investors, who are the ones pouring in the money, want to see that you’re right. And if they see that you’re only interested in labeling your company with a higher valuation, this may signal them that you’re not interested in long-term success. 

Of course, you have to negotiate the valuation of your startup. You should be equipped with the relevant knowledge and market data NOT TO downplay the worth of your company and give away more equity too early. 

Yet, you also don’t need to overestimate your business, as this may turn investors away, especially if you can’t prove your claims. 

Negotiations on valuation sometimes resemble a poker game—one player tries to convince the other that their hand is better than it actually is. However, it’s better to play clean, as sooner or later, investors will see the true worth of your company, but their trust may be gone for good. 

Valuation of a startup is essential, but you shouldn’t put it on top of your fundraising efforts. It’s better to focus more on your team’s strengths, product development, market potential, and traction, as they often play a more significant role in signing a term sheet.  

How to raise pre revenue startup funding?

The fact that your startup doesn’t generate revenue yet doesn’t mean you can’t raise funding. 

You definitely can, and, in fact, you have several ways to do it:

1. Angel investors

These wealthy individuals who typically invest their own money can give you early-stage funding in exchange for equity or the promise of equity (SAFEs or convertible notes) in your company. Angels often support pre-revenue startups that have high growth potential. 

2. Early-stage VC funds

Some early-stage VCs may take the risk and invest in pre-revenue startups. But as in the case of angels, VC investors want you to have a disruptive idea or an MVP, some level of market validation, and a clear path to monetization. 

Even though your company hasn’t brought in any money yet, it doesn’t mean that you should come unprepared—with no solid revenue model. VCs expect returns on their investment in the future, so be sure to show them how you plan to bring these returns to them. 

Also, prove that your pre-revenue startup solves a real problem and has a large market potential. 

3. Grants

When seeking pre revenue startup funding, you can also try some alternative options, such as grants (especially if you operate in tech, healthcare, and education sectors). Grants are non-dilutive investments from government agencies, non-profits, and other organizations. 

The good part is that you don’t need to give your equity or pay this money back. However, on the flip side, the amounts are smaller and you have to follow the strict criteria and objectives of the grant provider. Also, they are highly competitive. 

4. Accelerators and incubators

Another way to secure pre revenue startup funding is to join an accelerator or an incubator. They give not only money but also mentorship and resources. Their structured programs help startups develop a product, get customers, and raise further funds—all that a pre-revenue company might need. 

Similar to angels and VCs, accelerators and incubators take equity in return. 

No matter which path to funding you’ll take, remember to demonstrate your company’s potential—a strong vision, a cool team, a clear roadmap, and some early traction (even if it’s not in the form of revenue). 

Let’s get into more detail about which exactly potential you should show to investors:

1. Your growth potential: In the case of pre-revenue startups, VCs and angels are more interested in future growth rather than current financial performance. That’s why they typically look at the size of the market opportunity (TAM/SAM/SOM), your startup’s ability to scale, and how fast it can grow once it launches. You can demonstrate your growth potential through deep market research, product development progress, and early user engagement. 

2. Your vision and team: First of all, investors want to be sure that the founders know where they’re going and have the skills to execute their plan. Second, they want to know who is standing behind the idea—aka your team. If investors see that your team is capable of adapting quickly and crashing all the obstacles on their way effectively, they are more likely to back your pre-revenue business. 

3. Early user interest and market validation: If you don’t have revenue to show, show that there’s demand (for investors, this means there will be revenue). Let investors see your early user sign-ins, waiting lists, letters of intent, customer feedback, and beta test results. This will prove that there’s market interest in your product or service. 

4. Financial projections and models: Investors expect financial projections, even if you base them on assumptions. Try to include the estimates of future revenue, growth rates, and expenses. This is a path of your pre-revenue company to profitability—a thing investors value a lot.

You also need a strong financial model (for example, a SaaS or subscription model). This will help investors see how your business will make money and scale once it launches. Don’t forget about burn rate and runaway, as VCs and angels want to know how long it will take you to come for another check. 

1. Achievements and milestones: Pre-revenue means no revenue, but it doesn’t mean no achievements. Maybe you have a working prototype or even an MVP, or you’ve already secured some partnerships or maybe even built a user base. Show investors your wins. 

Equally important is to talk through some milestones you plan to hit in the future. It’s something like working on your product development, user engagement, or marketing—aka the use of funds or how you plan to allocate the capital investors will give you. 

Wrap-up: Pre-revenue isn’t a sentence for fundraising

Being pre-revenue doesn’t mean you’re automatically out of the running for raising capital. It actually means you have the chance to get your company funded. You just need to know what investors expect from a business with no revenue and target your effort on those specific aspects. 

Your team, vision, and roadmap to profitability are those three critical pillars on which you must base your pitch. As investors can’t evaluate pre-revenue companies in a more traditional way—through sales, profits, and cash flow—they’ll focus more on your potential to become a profitable and successful company. 

Also, try to avoid a startup valuation trap—yes, it’s important to calculate pre money valuation and post money valuation and, if needed, to negotiate the numbers, but don’t let putting the price tag on your company become the center of your investment meeting. Most investors will care more about how you execute and scale rather than a single valuation number. 

At Waveup, we know how to prepare for the fundraising process and, more importantly, win a round and make good connections with investors. Our team has already helped more than 1000 founders grow and fund their startups, and we can help you do the same. Contact us if you need assistance raising capital, building financial models, and crafting pitch decks.