Seriously, as a pre-seed investor, I see a fair volume of capital raises, and nailing the right range for a valuation sets the tone for success and timeframe for the round.

At the pre-seed, what’s really in a name?

This is usually where the “pre-seed is this, not that, and seed is this, not that” debate begins. Let’s not get bogged down. For the purpose of this discussion, let’s define pre-seed as the startup’s first or second round. The startup’s stage spans “pre-revenue + vision = potential” to “modest revenue + retention = traction”.

The key question founders need to answer is simple.

Are you raising on vision or on traction?

When you are pre-revenue, you are raising based on your vision and underlying components such as team, moat, unique perspective, unfair advantage, customer intention (e.g., LOIs), investor FOMO, etc.

These factors still matter once you have revenue, but when you are pre-revenue, they are effectively the only inputs an investor can use to price the round.

Once revenue exists, the story changes. The quality of the pipeline starts to matter. Metrics such as conversion, retention, customer acquisition cost (CAC), and lifetime value (LTV) begin to paint a clear picture of the traction you leverage to justify the valuation and round.

I often say that the answer to all founder questions about investment is the investor question:

“What’s your traction?”

So how do investors “calculate” early-stage startup valuations?

Ultimately, a startup’s value is set by the market. The pre-seed market is composed of angel investors, angel syndicates and a few VCs like Antler that play at this very high-risk end of the market.

Investors must decide whether they are backing vision, traction, or a combination of the two, and then determine what that is worth.  Invariably, they will look at comparable companies at a similar stage and the investment multiple typical for that business model and industry segment.

There are benchmarks based on business models for early-stage startups. These use a multiple of Annual Recurring Revenue (ARR) as indicative of valuation. Here’s a decent Perplexity search that explains multiples.

For example, e-commerce businesses are valued at 3x-6x depending on age and size of business. A high-growth SaaS business might command a 7x-10x multiple.

As a general rule of thumb, you can use 10x ARR as a typical high-water mark when thinking about your startup’s valuation. In some “strategic” cases, the multiple can exceed 10x, but this is the exception rather than the rule.

Pre-revenue startups, however, sit in a valuation limbo. Without revenue, they cannot use the revenue multiple. In Australia, these companies are typically valued between $2M and $4M based on the quality of the vision. This is not a hard rule, but it is a useful benchmark.

Two valuation case studies from 2025 illustrate this dynamic clearly.

Case in point, two 2025 pre-seed SaaS raises spring to mind. One Co was pre-revenue with a proof of concept (POC) and determined to raise +$1M on a $9M valuation. Two Co was at $900K ARR and determined to raise +$1M on a $9M valuation.

One Co was pricing in their forecasted revenues at year one. This is a pretty common mistake and, frankly, a rookie error. The forecast is helpful as a guide to where the business is heading, but an investor will discount that close to zero at the POC stage, unless there are really firm LOIs to strengthen the case.

One Co got an early “false positive” signal from a Family Office (FO) but struggled to find a lead investor and fill out the round. The FO agreed that the founder-set valuation of $9M was reasonable. Feedback from VCs was that they were priced too high.

Personally, I would have valued the round at $2-$4M based on the founder and minimal traction (POC), and suggested a more modest raise amount to preserve equity and drive towards more traction to justify a second pre-seed round at a higher valuation. They chose not to take that advice, and only time will tell how it plays out. We’ll unpack some of the potential ramifications shortly.

Two Co was priced right for the market and had interest from top-tier pre-seed VCs and strategic angel investors. They could negotiate favourable terms and have quality investors on the cap table to draw upon for their next round. While there was some back-and-forth around a slightly higher valuation, the founder judged they had landed on the right valuation based on market conditions.

So what about One Co, where does it go from here?

I predict that the company’s next round is going to be priced based on traction ARR + retention + sales funnel. Doing the math, they would raise flat at $1M revenue on $9M valuation. It would be better if they raise when they’re at ~$1.8M ARR, which would dictate a $18M valuation.

The uncomfortable truth is that they have gotten a great first valuation, but they’ve put themselves under a great deal of pressure to get to ramp revenue and cash to flow positive to survive and grow into their valuation. They risk a down round, which is often the death knell for an early-stage startup, at least one with unicorn ambitions (private company valued at $1B or more).

At the very least, they have set themselves up for some high expectations and heavy pressure from investors before achieving true product-market fit (PMF).

If we apply this same thinking and math to Two Co, their $9M valuation is justified, and they are well on their way to +2x valuation for the next raise.

Piercing and selling equity in your startup is just another form of sale, but it comes with high-impact consequences if you don’t attract the right investors and set a reasonable valuation based on the market. The pre-seed round(s) set up the company for capital raising success or failure, so the whole exercise is not to be taken lightly and should not be delegated to an agent or representative.

The top reason startups fail is that there is not a market need for their solutions; for example, the problem they were trying to solve did not have enough impact (size, urgency, or painfulness). The second reason is that they run out of cash, which is probably due to a lack of revenue or poor unit economics and an inability to raise capital from investors.

So get it right. Read the Feld & Mendelson book Venture Deals, read my other LinkedIn posts on these topics, and talk to founders who have raised and those who haven't.

If you have unicorn ambition, become a student of the capital raising game and then play like an elite athlete.

Learn the game, the market and play to win.