How VCs Value CompaniesHow do you measure the value of a pre-revenue company? Here's a bit of insight.

Over the years, I've heard plenty of entrepreneurs and VC colleagues talk about pre-product, pre-revenue and pre-profit valuations as if they can all be lumped into distinct categories. But while this type of analysis is part of the art and negotiation of early-stage company valuations, it is far from formulaic.

When I hear VCs spout generalities such as "The going rate for post-product, pre-revenue companies is $5 million to $7 million," I tend to think of Oculus VR, which was acquired by Facebook for $2 billion before its first product hit the shelf.

When entrepreneurs come to me with the same sort of outsized expectations, I conduct a little drill: I ask them what kind of response they think they would get if they told their three largest competitors that they were selling the company in 10 days. Would the notice get shrugged off, or would it create a bidding frenzy? Ninety-nine percent of the time, the response is "meh."