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 valuation states that it is the 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.
| Sales | |
|---|---|
| 50 Enterprise customers with signed annual contracts for recurring revenue | $3M |
| 25 Enterprise customers with signed annual contracts for recurring revenue | $2M |
| 10 Enterprise customers with signed annual contracts for recurring revenue | $1M |
| 5 Enterprise customers with signed annual contracts for recurring revenue | $750K |
| 3 Enterprise customers with signed annual contracts for recurring revenue | $500K |
| 1 Enterprise customers with signed annual contracts for recurring revenue | $250K |
| 1 paying customer with no recurring revenue | $100K |
| Ten beta users | $50K |
| No customers or users | 0 |
| Team | |
|---|---|
| 3 C-level team members with industry and startup experience and Distribution channels & Partners | $3M |
| 3 C-level team members with industry and startup experience and Distribution channels | $2M |
| 3 C-level team members with industry and startup experience | $1M |
| 2 C-level team members with industry and startup experience | $750K |
| 1 C-level team members with industry and startup experience | $500K |
| 1 C-level team members with startup experience | $250K |
| One founder with startup experience | $150K |
| One founder with no startup experience | $50K |
| No leadership team | 0 |
| Product | |
|---|---|
| The 1st, 2nd and 3rd product is complete and ready for paying customer usage | $3M |
| The 1st and 2nd product is finished and ready for paying customers | $2M |
| The product is finished and ready for paying customer usage | $1M |
| The product is a minimum viable product that is ready for paying customer usage | $750K |
| The product is in beta stage | $500K |
| The product is in alpha stage | $250K |
| No product | 0 |
| Intellectual Property and other Moats | |
|---|---|
| Patents are filed and awarded & Proprietary data sets and algorithms | $3M |
| Patents are filed and awarded & Proprietary data sets | $2M |