Beware Pre-Revenue Companies

What’s scarier than a clown? A pre-revenue startup with a $5 billion valuation.

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That was autonomous trucking startup Embark Trucks, which now faces liquidation. From Crunchbase News:

Autonomous trucking startup Embark Trucks capped off one of the faster riches-to-rags stories of the SPAC era, announcing that it is laying off most employees and winding down operations.

The planned closure comes just 16 months after San Fra1ncisco-based Embark went public through a SPAC merger at a target initial market capitalization of $5.16 billion. Even by the bubblier market conditions of the time, the deal set an astounding valuation for a pre-revenue company, with backers touting its “sophisticated self-driving software,” built to navigate trucks on long-distance freight trips.

By all accounts, founder Alex Rodrigues tried his best. But the demise of Embark shows just how dangerous it is to invest in pre-revenue companies.

As an angel investor, I never touch a pre-revenue startup.

Maybe that pre-revenue company becomes the next Google. But today, it’s completely reliant on fundraising and doesn’t have a single paying customer.

The sad truth is most pre-revenue companies will never make a dime.

As an investor, you have to play the odds. If you invest in pre-revenue companies, you will lose your money the vast majority of the time.

Once those first customers roll in, you have a much better idea what your market is. You can also look for a growth trend.

What’s more, the company is no longer entirely dependent on the next round of funding.

But what if you miss your chance to invest?

Investors have to take that risk. And never forget, startups are always raising money.

More than likely, there will be numerous chances to invest in the future.

Best of all, a pre-revenue company and a company with some early revenue often go for about the same price! What’s the better bet — a company with no customers at a $5 million valuation or a company with $200,000 a year in revenue at $8 million?

Unless you’re an extremely experienced investor, the latter bet is better 10 times out of 10.

Back to Embark….if a pre-revenue company at $5 million is a bad bet, why would you pay $5 billion? Even with a few customers, that price would be rich.

Had investors simply waited until they signed 3 paying customers, they could’ve averted billions in losses.

So, should we ignore all pre-revenue companies?

No. Actually, I meet with them regularly.

Sometimes a great team has an awesome product that they’re just starting to sell. It’s good to meet them early and get the inside track.

But it’s not the best time to invest.

What do you think of pre-revenue startups?

Leave a comment and let me know!

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