“Why is it worth millions?”

It has no customers. It has no product. In a lot of cases it has nothing but a pitch deck and a founder’s ambition. So how is it worth four million dollars?

That’s the first question almost every new angel asks, and it’s a good question. It’s also the wrong one, and to show why, I want to start somewhere that looks like a detour: what a dollar really is.

A dollar is a claim on future cash

Strip finance back to first principles and money is just a claim on future cash. That’s the whole of it. A share in a company is a claim on the cash that company will throw off one day. A bond is a claim on the coupons and the face value. Even a dollar in your pocket is a claim on whatever you choose to buy with it later.

And a dollar today is worth more than a dollar in a year. Not mainly because of inflation, though that’s part of it. It’s because of what the present dollar lets you do in the meantime: invest it, spend it, or sit on it as a hedge while you wait to see what happens. The future dollar can’t do any of those things for you yet. This isn’t a theorem you have to take on faith. Anyone who’s waited on a payment they were owed already feels it. The machinery of finance is just the attempt to make that feeling precise.

The trouble is, the future cash isn’t a number

Here’s where it gets interesting, and where the new angel’s instinct often goes wrong.

If you back a startup today, what does it return when it eventually resolves? In the real world the honest answer isn’t a number, it’s a distribution. The company might be acquired for a large multiple in a few years. It might go to zero. It might trundle along and return your money with little on top. Many outcomes are possible, and the probabilities are uncertain, and none of them pays out next year. The whole thing sits years out.

So how do you value a claim on something that uncertain? You take the expected value, that is, the probability-weighted average of every outcome. You don’t need a thousand-line simulation. You can run what I think of as the poor man’s Monte Carlo: pick three representative cases, assign each a probability, and take the weighted average.

•         High case — the company succeeds strongly: say a $50M exit, 20% likely

•         Mid case — a modest result or trade sale: say $10M, 40% likely

•         Low case — failure, little or nothing recovered: $0, 40% likely

Weight and add: $50M × 0.2, plus $10M × 0.4, plus nothing for the rest. That’s $10M plus $4M, so an expected value of $14M for the eventual outcome. The point isn’t the precision; three cases is deliberately crude. The point is that you now have a single number you can reason about and stress-test in your head, built honestly out of the uncertainty.

The risk-free rate is the floor

Now, what return should you demand on that? To answer it you need a baseline, and the cleanest one in all of finance is a government bond.

When a government issues a bond, the distribution of outcomes I just described collapses almost to a single point. The probability of default is close to zero. The variance is close to zero. The cash you’re promised is, to a very good approximation, the cash you’ll get. Because there’s no uncertainty left to compensate for, there’s no premium to demand, and the yield on that bond, the risk-free rate, becomes the floor beneath every other investment.

Everything riskier than that bond has a wider distribution, so you demand more return to absorb the wider range of outcomes. That excess over the risk-free rate is the risk premium, and it’s the most useful and stable idea in the whole toolkit. Any investment must beat the risk-free rate. Everything past that is a negotiation over how much risk you’re being asked to carry, and how much you’re paid to carry it.

That negotiation is what a discount rate is. It’s not a magic number someone pulls from the air. It’s the risk-free floor plus a premium that reflects how wide and uncertain the distribution of outcomes is. Hold that thought, because we’re about to apply it to something that, on the surface, looks worthless.

The objection that feels right

Now, back to the startup. The new angel’s objection has surface plausibility, which is exactly what makes it so seductive. A business with no revenue is, on the face of it, generating nothing. Judged by the most common rule that a thing is worth what it earns, a pre-revenue company is worth roughly zero, and a four-million-dollar valuation looks like a delusion or a con.

I had a version of this myself starting out. Being comfortable with the theory that money is a claim on future cash doesn’t automatically make you comfortable writing a cheque for a company that, by any visible measure, has nothing.

So put the startup down for a moment, and look at a house.

The derelict house

Picture a vacant inner-city block with a derelict house on it. Apply the rule we just applied to the startup. No rental income and no tenant. The house is uninhabitable and has to be knocked down before anything can happen. By the “worth what it earns” test, this asset is worth nothing! Actually, less than nothing, because someone has to pay to demolish the house.

And yet prime inner-city land changes hands at very high prices every single day. Nobody stands in front of a vacant block in a good suburb and calls it worthless because no one’s living in it. The intuition that works fine for the startup switches off when we’re looking at dirt.

How does a developer value that block? The method has a name: the Residual Land Value method. Notice that it’s the expected-value-and-discount logic from earlier, wearing work boots. You start at the end. What’s the finished apartment building worth when it’s built and sold? Then subtract everything it costs to get there: construction, professional fees, holding costs, finance. Apply a discount rate to what’s left, to account for the time and the risk of pulling the build off. What remains is the value of the land today.

You don’t value the land by what it earns now. You value it by what can be built, what that will sell for, what it’ll cost to get there, and what return you need to justify the journey. What’s left over is the land.

It’s the same calculation

This is structurally identical to pricing a pre-revenue startup. Line them up:

•         The land is the startup

•         The finished building is the exit

•         The construction cost is the capital the company will burn on the way there

•         The discount rate is the investor’s required return – the risk-free floor plus a premium for everything that can still go wrong.

For most early-stage companies the near-term cash flows are negative; the company is consuming capital, and whatever value exists sits in a terminal event years out. So early-stage valuation is almost entirely a question of that terminal value and the rate you discount it at. Everything else is arithmetic. The derelict house makes it concrete in a way a spreadsheet never will, because everyone already believes the land is worth something. You just have to notice you’ve been running one rule for the dirt and a different rule for the company.

What discount rate does the developer use?

That’s exactly the right question to ask next, and the answer is the same in property as in venture: it depends on what risk is left, which is just the risk-premium idea applied dynamically.

A raw block with no development approval carries planning risk, construction risk, and sales risk all at once. Wide distribution of outcomes, big premium, high discount rate. A block that already has its DA approval, pre-sales signed and finance committed carries almost none of the original risk. The distribution has narrowed sharply, so the premium shrinks and the required return falls with it.

The discount rate is a variable that tracks the risk remaining right now, and it falls as milestones are hit. That’s the same logic venture applies to startups, and it’s why a company that’s just reached product-market fit is worth more than the same company six months earlier. The business isn’t further along in any physical sense. A major chunk of variance has simply been removed from the distribution.

Every milestone reprices the risk

Here’s the part that matters most for an angel.

Development runs through a sequence of gates: zoning, DA approval, demolition permits, construction certificate, progress draws, occupancy certificate, settlement. Each gate cuts risk and lifts value. Fail one and the project can die.

In property, some of those gates are genuine exit points. A developer who secures DA approval on a difficult site can sell the approved site to another developer at a real premium to what they paid, having removed planning risk from the distribution, without ever pouring a slab. Startups are not quite so clean. There’s no deep secondary market for an early position, so a milestone is mostly a repricing event rather than a guaranteed way out: the next round prices the de-risking, and only sometimes can an early investor sell down into it.

But the repricing logic is the same, and it’s most visible in regulated sectors. A medtech or biotech company moving through TGA approval, clinical trial phases, or FDA clearance is following a milestone sequence every bit as structured, and as binary, as a DA process. The value step-change at each approval can be dramatic, and each approval is a point where later-stage capital will price a now-narrower distribution. The same pattern shows up in the deep-tech deals we see in companies like Ubaryon, which I wrote about in The Reactor in the Shipping Container, where the value lives behind a series of technical and regulatory gates rather than in any current revenue.

Where you stand on the curve

So the four-million-dollar valuation on a company with no customers isn’t a delusion or a con. It’s a block of land with a derelict house on it, priced by what can be built and what it’ll cost to build it, discounted for the time and risk of getting there — the risk-free floor, plus a premium for a distribution that’s still wide.

The investor who comes in early is accepting that wide distribution in exchange for a low entry price. The investor who comes in late is paying for variance that’s already been removed. Neither is wrong. They’re standing at different points on the same de-risking curve, each looking forward at a different set of risks and pricing only those.

Once you see it that way, the question stops being “how can this be worth millions with no revenue?” It becomes the more useful one: what are the milestones that collapse the variance from here, and does the price I’m being asked to pay reflect the risk that’s left? That’s the question worth arguing about. The valuation number itself is the price of the ticket, not the quality of the destination, which is a separate question about how I choose deals.

Where the numbers come from, why the maths keeps landing on that three-to-five-million-dollar range, and why a 100% discount rate isn’t the return anyone expects, is the subject of the next post.

Richard Moore — MooCoo Ventures

Richard Moore is co-founder of MooCoo Ventures, an angel syndicate that co-invests alongside Brisbane Angels, one of Australia’s most active angel groups. He has made over eighty personal angel investments since 2013.

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