An essential guide for pre-profit and pre-revenue Indian startups

As part of the LawCrust Strategic Holding Division’s, we at LawCrust experience a spectrum of ‘innocence’ among startup entrepreneurs. Their expectations range from the extremely thoughtful to the downright bizarre. While our experience in fundraising advisory has been amazing, the critical nuances of a startup truly begin with the background and mindset of the people taking on this adventure.

We’ve seen it all. Consider a founder we backed with a $1.5 million initial seed investment. Despite having over 25 years of experience in the FMCG sector, we realised after a year of engagement that this founder was absolutely short of risk-taking capability. Similarly, in another venture with a fantastic 25-year vintage, the owners wanted an outright sale to pivot to a new venture. This proved impossible, as the business was heavily dependent on human resources. As one of my fund managers radically questioned: “What if all the assets of a company decide not to come to the office after the boss and the management changes!“

This leaves a peculiar dilemma in the startup ecosystem: a vintage of 25 years is sometimes taken with a pinch of salt, yet a newcomer with fabulous experience is often treated the same. There’s an undeniable overhype created by social and other media, which has contributed to the psyche of new entrepreneurs. They jump into the sea of opportunities like those who try to gauge the market through paper trading, jumping in when they perceive a low, thinking it will only go up! Many of these new entrants, irrespective of age, are fundamentally lacking the basic economic and business knowledge needed to navigate the ocean of sharks.

The Valuation Disconnect: Why Founders Overestimate

For a pre-revenue or pre-profit venture, valuation is not an exact science it is a negotiation based on future potential and de-risking. Too often, new founders mistake a high perceived valuation for a high worth, fueled by media stories of unicorn success.

Founders must confront the reality that for a venture yet to prove its model, profitability, or even revenue, the valuation is heavily scrutinised based on several grounded factors:

1. The Team’s ‘Skin in the Game’ and Risk Appetite

Your valuation is initially a reflection of you and your co-founders.

• Experience is Key, but Mindset is Crucial: Experience in a corporate job is not a substitute for entrepreneurial risk tolerance. Our experience with the FMCG founder shows that high-level employment often cultivates a risk-averse, process-driven approach the opposite of what a fledgling startup needs. A fund manager is investing in your courage and commitment to persevere through inevitable setbacks.
• The ‘Walk Away’ Test: If you’re mentally prepared to go back to a high-paying job, your risk-taking capability is low, which directly discounts your potential for exponential growth and, consequently, your valuation.

2. Market Size, Solution Uniqueness, and Scalability

Since you don’t have revenue, investors must quantify your future potential.

• Total Addressable Market (TAM): How big is the market you’re solving a problem for? A niche solution for a small market, no matter how brilliant, will have a limited valuation ceiling.
• Defensibility and Uniqueness: What stops a larger player from copying you? Your Intellectual Property (IP), a unique proprietary process, or a first-mover advantage creates defensibility and commands a higher value.
• Scalability: Can your model grow 10x or 100x without a proportional increase in costs? Highly scalable models (often technology-enabled) justify a higher pre-revenue valuation.

3. Early Traction and Proof of Concept (Even Without Revenue)

Valuations increase as risk decreases. You must show that the idea is moving from a ‘thought’ to a ‘thing’.

• Customer Validation: Have you conducted successful pilot programs? Do you have Letters of Intent (LOIs) or pre-orders? Demonstrated customer interest is a powerful de-risker.
• Strategic Partnerships: Have you aligned with established players for distribution or technology? These partnerships provide a proxy for market acceptance.
• Minimum Viable Product (MVP) and Technology Readiness: Is the product built, tested, and ready for deployment? The closer you are to launch, the more certainty you provide.

The Education Gap: Why Fundamentals Are Missing

I believe, to some extent, that our educational system is designed to create a good employee. Even after an MBA, a significant number of graduates eventually opt for jobs. Those who find this path acceptable should perhaps avoid the treacherous, high-risk waters of business and startups.

The genuine entrepreneurs are those who find the default path of ‘job after MBA’ frankly funny or unfulfilling. On a serious note, we need more formal, practical education on startups and business fundamentals at graduate and postgraduate levels.

We tried to bridge this gap. We approached a reputed five-star college and offered a bootstrap solution worth INR 2.5 million to a group of 60 candidates. After a workshop and host of interviews, we could not find a single candidate with the necessary entrepreneurial acumen.

The root causes we identified were clear:

1. Risk-Taking Capabilities: This was not a skill taught or encouraged in the academic environment.
2. Financial Over-Commitment: The college had already absorbed substantial fees, leaving candidates unwilling to take any further financial or career experiments.
3. Lack of Courage: While colleges may charge high fees, the candidates themselves must possess the courage to seek practical, foundational knowledge outside of conventional academics.

The take-away for new founders is this: Financial expertise, risk assessment, and basic economics are your core product. If you lack these fundamental skills, any valuation figure you arrive at is merely a fantasy.

Final Advice: Anchor Your Expectations in Data, Not Dreams

When seeking funding for your pre-profit venture, ditch the social media-inflated expectations. Use methods like the Scorecard Method or Berkus Method as a starting point, which value intangibles like a great idea, prototype, and management team, assigning monetary value to the reduction of risk.

A realistic valuation is the one an experienced investor is willing to pay after a rigorous due diligence of you, your team, your market, and your plan. Focus on proving your model, building traction, and demonstrating that risk-taking is not a foreign concept to you. That is the true asset that commands value.

About LawCrust

LawCrust Global Consulting Ltd. delivers cutting-edge Hybrid Consulting Solutions in Management, Finance, Technology, and Legal Consulting to ambitious businesses worldwide. Recognised for our cross-functional expertise and hybrid consulting approach, we empower startups, SMEs, and enterprises to scale efficiently, innovate boldly, and navigate complexity with confidence. Our services span key areas such as Investment Banking, Fundraising, Mergers & Acquisitions, Private Placement, and Debt Restructuring & Transformation, positioning us as a strategic partner for growth and resilience. With an integrated consulting model, fixed-cost engagements, and a virtual delivery framework, we make business transformation accessible, agile, and impactful.

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