How to Value a Startup Part 1: Is It Unknowable?

Asking the question “What is the value of the startup?” is akin to asking “What is the meaning of life?” Both questions are frequently asked and both answers are – in many ways – difficult to discern. It depends on who does the asking and when.

A business owner might want to value their company quite high to attract investors or they might dial their valuation back slightly with the hopes of retaining a little more for themselves. An investor might value a company much lower, simply from experience or because they have their finger on the pulse on the industry, or they might value it higher because they’re hoping to bring other investors on-board. It’s context, people! Who does the valuing, when it’s done, and why it’s being done.

Valuing a business isn’t easy. Google a phrase like “how to value a startup” and you will get a list of results that vary widely, with many suggesting that valuation is an art not a science. Sadly, the conversation often stops there, or descends into less-than-helpful discourse about the subjectivity of startup values. After all, it’s hard to place a value on a company that earns no money. A basic assets-versus-liabilities balance sheet analysis falls far short. So then a valuation seems philosophical and ends up with a philosophical answer.

To borrow the idea that valuation is art, we’ll put forward that it is most like a collage: By taking a picture here of one aspect of the business (like the balance sheet, for example) and a picture there of another aspect of the business (like the value of patents), investors should come to a clearer picture of the true value of a company. But we believe it is less subjective than many are suggesting.

In the coming weeks, we’ll be blogging about each of the “pictures” that an investor will need to take of the business to create that composite (and realistic) collage of a business’ value. On their own, each of these pictures will fall far short of providing the true value of the business, but when taken together, the clearest picture of the business’ value will be revealed.

This is no place for lazy investors! The bottom line for the most accurate valuation is rigorous due diligence (which hopefully does not come as a surprise to you) and multiple techniques to form a composite picture that will give the value of a company. Some valuations will be pretty technical, some will be easier to perform, but ultimately we’ll strive to reduce the amount of subjectivity in startup valuation so the worth of the business will be revealed through trusted numbers. Don’t miss next week’s article for this series!

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• Photo Credit: fotologic