Does your startup have the potential to join the Billion Dollar Club? The only way to find out is by fully understanding the value of your company and the market in which you operate. Obvious? Maybe. Of course, if you’re already a publicly traded company the market determines your value, but what if you’re a startup and you need to set a value for your next financing round?
Labour force, turnover, number of clients, IP status, fixed assets, and mortgages are just a few of the standard values that need to be considered in order to calculate your startup valuation, however I want to introduce some less obvious ones in order to help you really make an accurate valuation:
1.- GOODS: Okay, this one isn’t really intangible on paper, especially your fixed assets, but increasingly the market value of your current assets may contain more wiggle room than you thought. Using a Fair Market Value (FMV) approach to your appreciating assets such as domains, brand image and social media communities definitely leaves room for some creative manoeuvring during the valuation process. The value of these items are exactly equal to the amount someone (anyone) is willing to pay for them.
2.- TEAM: Some investors put a lot of effort in getting to know the team and knowing the value in it. In fact, many acquisitions take place solely because the buyer wants the talent, not the company. Those are called acquihires. Always keep in mind that the people you hire – their background, expertise and work ethic – are adding to, or taking away from, the value of your company.
3.- PRODUCTIVITY: If the company’s production and execution is better and faster than the competition and the market average, you can consider it to be more valuable than the rest. This absolute obsession with efficiency is where a company like Apple earns its crown. Knowing your field and who else is in it will give you a better idea on where you stand relative to the competition, but keeping your focus on constant improvement is what matters most.
4.- MARKETPLACE: Understanding the value of your TAM (Total Addressable Market) is absolutely critical in your valuation process. Start with your core competency/value proposition and calculate the size based on the current needs. However, don’t forget to include potential adjacent markets that you can cater to as your company evolves. Do you think Uber received a €40B valuation on livery services alone? No, it’s because they can disrupt shipping, medical, food and other markets as well.
5.- CONSOLIDATION: If your company hasn’t been tested yet in the open market, it is hard to prove your valuation and it’s an investors job to find out the maturity level your industry. Is there a lot of M&A activity happening in your field? The level of market consolidation and amount of new entrants entering your space have a profound affect on the potential value of your specific venture. For example, if no real powerhouse has emerged yet and the field is still wide open, you can get a better valuation because there are more opportunities to be taken.
6.- INVESTMENTS: Previous investment by the founders in stock, office space, physical goods needed for the company to succeed can be another way of measuring the value of the company. In the long run, those items can be of monetary value and evaluated as part of the company’s price.
7.- INTANGIBLES: Okay, I cheated (again) – these are traditional intangibles: Scoreboards on team effort, work ethic and progress, index of growth, and the utility the users acquire by obtaining the company’s product can be a good index of valuation of the merchandise and on the company itself.
8.- 3rd PARTY VALUATIONS: The government, mentors, lawyers, and other outsiders may be able to help you giving a more accurate valuation. Based on their expertise, and considering they actually have one, their ideas and points of view may be interesting to use.
9.- FOUNDERS: The founders education and expertise on directing a company, management, and finance, can be a huge advantage to make the company successful. Only a third of start-up companies in Spain have a team with such expertise. Knowing this fact, when attracting investors it can be used to the company’s advantage for a higher valuation.
10.- CLIENTS: Feedback from clients about the company and the product itself can be a great way to give a valuation. If the product is being accepted, the company has good reviews and the clients are happy, probably the valuation is going to rise exponentially.
Bottom line, and this is coming from my own expertise in the field, the more clients you already have the higher your valuation. The more exposure you have in the market and the more impact you have in the public eye, you will be perceived at higher value. Remember, clients (or users) don’t always need to be paying customers, just like assets don’t always need to be owned.
In 2015, the largest hotel company (Airbnb) doesn’t own any real estate, the largest media company (Facebook) doesn’t make any content, and the largest taxi company (Uber) doesn’t own any cabs.
Lastly, and you may want to kill me for saying this but try to grow organically. Don’t go looking for money if you are not yet ready scale! Remember, the second you take VC money, you now have a boss and will be under constant pressure to show 10X+ return. Many times it’s that pressure that kills your company, not external forces.