Why Your Pre-Revenue Food Startup is Worth Millions 🍉💰 🍡

Or at least how to pretend…[downloadable Excel model included]

You have an idea for a food startup. It’s a huge market, you have founder-product fit, a unique insight to differentiate from and perhaps undercut the competition, a viable business model, and all the other traits investors want to see.

One problem. You haven’t sold any product. Not $1.00. So how do you determine a valuation?

Let’s say you’re starting Penny’s Pretzels. You’ve even made a logo!

As they say, having a logo is half way to having a company

So you search around, discover, and request access to The Be-All End-All List of Food and Beverage Investors. A helpful guy points you in the right direction and you soon find yourself in front of the few venture capital firms willing to invest in pre-revenue CPG brands.

You nail your in-person partner meeting with Hungry Hippo Partners. As you wrap up, the following conversation unfolds:

Partner: So how much are you raising and on what terms?

Founder: We’re raising $1.5MM in equity to fund the initial MOQ from our co-packer, our launch marketing plan, and give us 18 months of runway.

Partner. Okay. What is your valuation?

Founder: $7 million.

Partner: $7 million! You better have a damn good reason why!

Founder: I just think that’s what it’s worth.

Angry VC

The meeting ends disastrously. You walk away empty handed and the great Penny’s Pretzels, logo and all, fails.

Years later, you return to the food business wiser than before. You unearth the plans for Penny’s Pretzels from your cloud drive, convinced the genius of your idea remains as true today as it did back then. Your added years of experience twisting pretzels will surely make you ready for investment this time around.

The VCs decide to give you another chance and you arrive at Hungry Hippo prepared to defend your $7 million valuation. How?

While the valuations below don’t account (or more accurately discount) for the (large) additional risk associated with a company yet to even launch a product, they do at least offer a starting point for backing up your ask.

There is limited information regarding quantitative methods for valuing early stage companies. Speaking from my time at Techstars and watching many of those companies raise rounds pre-revenue, it’s often a much more qualitative matter.

DOWNLOAD: Penny’s Pretzels — Pre-Revenue Valuation Model

That being said, a few data points below should help you position Penny’s Pretzels as attractively as possible:

1. Publicly available data from CircleUp reveals equity deals in companies with less than $1MM in LTM revenue offer a $3.5MM median valuation with a 75th percentile of $5.0MM. Given the huge market opportunity and a key strategic partner with a successful track record willing to partner with Penny’s from the beginning, you prepare to argue for a $2MM premium to the 75th percentile.
2. Food companies with greater than $1MM LTM revenues had 25th, median, and 75th percentile multiples of 2.2X, 2.9X, and 3.9x, respectively. Beverage companies with greater than $1MM LTM revenues had 25th, median, and 75th percentile multiples of 3.3X, 3.8X, and 4.7x, respectively. Averaging the two and positioning it to investors as part of the broader “food and beverage” category, yields 25th, median, and 75th percentile multiples of 2.8X, 3.4X, and 4.3x, respectively.
3. Another approach backs into the needed VC returns and justifies your valuation starting with a theoretical exit price. For Penny’s Pretzels, you reference Snyder’s acquisition of Snack Factory for $340MM and account for a possible return of 30x, yielding a post-money valuation of ~$7.0MM on a $1.3MM raise, accounting for 30% dilution.
4. Finally, you can adapt the Berkus Valuation, whereby each of five criteria is assigned a maximum value of $400,000. Generalizing the logic and calling it a “factor valuation,” you choose criteria and assign values you can support. The attached Excel achieves a ~$7MM adjusted pre-money, based on ascribing various values to five factors:

• Experience level of the Entrepreneur / Management Team
• Product Differentiation and Customer Validation
• Category Size, Growth, and Competitive Landscape
• Unit Economics (Pricing, Margins, and Growth)
• Path to Exit

There is one surefire way to leave your meeting as empty handed as before. In my investment banking and Techstars experience, I’ve never saw an actual DCF used as a valuation method for an early stage company, let alone a pre-revenue one. At least at Houlihan Lokey, a DCF is only considered valid once there are stable, at least somewhat predictable, cash flows.

Leaning towards a mix of qualitative factors and multiples of forward projected revenues in the most reasonable approach in a situation where it’s understandably difficult to assess a company — or really a potential company’s — value.

Equipped with newfound wisdom, you apply the above logic as a déjà vu conversation mirroring your first post-partner meeting with Hungry Hippo Partners begins to unfold.

Everything turns out fantastically well. You complete the raise, albeit at a $5MM pre-money, and have the funds necessary to begin building Penny’s Pretzels.

As they say, having a logo and funding is all you need

So how do you put together your first set of projections? How do you prepare a cap table? What is a cash flow model and why do you need one — and why shouldn’t you just use a template?

Stayed tuned and connect with me on LinkedIn or follow me on Twitter for answers to these questions in the coming weeks!