About StartUp valuation — 3 learnings for founders

  • How the … that startup is valued at 1 / 10 / 100 m / bn $ without having … revenues?
  • Why on earth could anyone invest … dollars at such a valuation, there is practically no chance to see that return?
  1. Companies do not have objective values. At all.
  2. Investors are not stupid: liquidation and other preferential rights. (I believe that is most interesting and rarely discussed factor)
  3. StartUp value is also branding.

1. Companies do not have objective values. At all.

  • You can consider Fundamentals. Meaning value is derived from the actual financials of the enterprise: DCF, Book Value, Dividend-based approaches, etc (note: even those include hypotheses and provides you with value ranges rather than discrete value points);
  • Then you can consider Market habits. How much others pay for similar companies, whatever the rather philosophical “similar” means. So you pick some comparable metrics: P/E, P/BV, P/Sales, P/Div, etc. Interestingly, these are typically considered as Fundamental Analysis, but I hope now you clearly see that the basis moved from the company’s operation to a new field: what market players tend to do, as a benchmark;
  • Then you can set up values based on Money/Liquidation trends. Pure traders base their decisions on factors quite far from the business itself: technical indicators of price and volume movements, expected future investment trends, thinking in portfolios regulated by various rules and compliances, etc;
  • … and the many-many bespoke strategies. Like when you suspect a given corporate, industry or country will need to do something due to external conditions.

2. Investors are not stupid: liquidation and other preferential rights.

  1. Founders have the chance to build a large and hopefully operating business from someone else’s capital. Assuming a great strategy (and a bit of luck), the revenues/values generated will tremendously lift the founders’ take in case of an exit. I know we are human and everyone has a different viewpoint about such dynamics.
  2. If the business grows, founders in management positions can work and live according to their role in terms of salaries, benefits, etc. Even in the case of “mediocre operation” (aka missing excessive expectations), a top managerial role is maintained together with some equity value gained. Well deserved after all the grind and risk-taking. Still, it’s not that bad anymore, is it?

3. StartUp value is also branding.

  • High valuations increase pressure on founders and investors. Ambitions expressed, time to unite under the flag and march towards the goal. A purpose for your daily grind!
  • Recruitment gets easier. Employees are happier to join a company where a high valuation is published suggesting business growth expectations and probably some investors validated the operation… and perhaps some equity is already on the table. (Apart from common sense and anecdotal evidence, I know I have read a study recently about the relationship between becoming a Unicorn and being able to attract more talents… which study I do not find anymore. If you read it, would be great to see a link again in comment.)
  • Increases trust in clients, especially when targeting enterprises. Door opening is so much easier for a startup having an investor-backed 10m-valuation — than emphasizing 1–2m revenues and 0 profits.

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AbilityMatrix

AbilityMatrix

Customer experience strategy resulting in new or improved products and services. We measure customer experience and create strategies.

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