How do you value a company with no revenue?
A core Valuation interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Pre-revenue companies (biotech, deep-tech, early start-ups) need methods that handle the absence of current cash flows and high uncertainty. Options, usually triangulated: (1) a risk-adjusted/probability-weighted DCF — model the eventual cash flows of success scenarios and weight them by the probability of reaching each milestone (rNPV is standard in biotech, weighting by clinical-trial success rates), discounted at a high rate reflecting the risk; (2) the venture-capital method — estimate a future exit value (e.g., a revenue/EBITDA multiple at maturity) and discount it back at a high target return, then work out the implied current value and ownership; (3) comparable transactions/financing rounds of similar-stage companies; and (4) for asset-heavy cases, replacement/cost or sum-of-the-parts of the IP/pipeline. Real-options thinking also fits, since management can abandon or expand as information arrives. The key is being explicit about the probability and discount-rate assumptions — value here is dominated by the chance of success and the size of the eventual prize, not current numbers.
WHAT INTERVIEWERS LISTEN FOR
- ✓Risk-adjusted/probability-weighted DCF (rNPV) for milestone-driven success scenarios
- ✓Venture-capital method: discount a future exit value at a high target return
- ✓Comparable transactions/financing rounds of similar-stage peers
- ✓Replacement/SOTP for IP; real-options lens; assumptions on probability/discount dominate
COMMON MISTAKES
- ✗Applying a standard DCF/multiple to no cash flows
- ✗Hiding the probability-of-success assumption
- ✗Using a normal discount rate for an extremely risky venture
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