I've worked as an analyst for an early-stage VC firm, and at that stage valuation is much more an art than a science. With pre-revenue companies, there are two important questions for the VCs to ask themselves:
1. How much money do they need?
2. How large a percentage of equity do we want?
#1 can be easily determined. #2 needs to be played with a bit, as a good VC firm won't want to take enough equity to demotivate the founders at all, yet still wants to see an attractive return (based very roughly on their own financial projections for your startup).
This is, of course, how it works after a firm has decided to make an investment in your startup. Good VCs won't really even bother with pre-revenue company valuations until after they've decided that they want to work with you.
1. How much money do they need? 2. How large a percentage of equity do we want?
#1 can be easily determined. #2 needs to be played with a bit, as a good VC firm won't want to take enough equity to demotivate the founders at all, yet still wants to see an attractive return (based very roughly on their own financial projections for your startup).
#1 * 1/#2 = post-money (after investment) valuation
post-money valuation - #1 = pre-money (before investment) valuation
This is, of course, how it works after a firm has decided to make an investment in your startup. Good VCs won't really even bother with pre-revenue company valuations until after they've decided that they want to work with you.