To value a startup, you have to think like an investor. How does an investor think about investing in startups? Well, in my experience, investors think of investing in startups something similar to investing or buying a lottery ticket.

Most lottery tickets are going to be losers, but every once in a while, if somebody gets a winning ticket and they make a lot of money, that's the way that we value the startups. From an angel capital perspective, if they succeed on 20% of their investments, that's a very high success rate.

Investors know that all startups, or at least the ones they're considering investing in, are promising very high returns and carry with them very high risk. To assess the value we look at the valuations that have been reported for other early-stage startup investments, which we can find sometimes through research such as Google or professional databases such as CrunchBase or PitchBook or Capital IQ, or others databases that are out there.

If we observe the valuations for similar startups in a similar industry within a relatively short time frame, say the last two or three years then we can generate a set of comps similar to what you might be familiar with in real estate. And from that comp set, we can then analyze those valuations to infer what an appropriate value might be for our startup.

It's not going to be as precise an evaluation methodology as some other valuation methods. However, it does have the benefit of being consistent with the way actual investors decide to commit their capital which is a meaningful consideration.

Now, a related way to do this, if you don't have access to these professional databases, is to look at the public markets. It turns out that in the public markets in the United States, Canada, Europe, and Israel, there are thousands of pre-revenue or very low-revenue startups that are traded every day. Sometimes these are called pink sheet companies, sometimes these are called bulletin board companies. They are effectively publicly traded startups and you can find their effective venture capital style of valuation by simply looking up their market capitalization, which is the total number of shares times the price per share, and subtracting the amount of cash that's on the balance sheet. In doing so, you're computing what's called a pre-money valuation or evaluation before the money is added to the balance sheet, which is similar or almost identical to the way valuations are stated in the venture capital markets. So this gives you another set of data points that you can use to attempt to produce a reliable valuation of a startup that is also unbiased and tied to the market.

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