How to Value a Startup Part 1: Is It Unknowable?
The Hyper Team @ Venture Hype | Jun 24, 2009
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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Filed Under: Angel Investing Basics • Valuation
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Understanding how to value your start up is very important, with out it you are basically throwing your money away. Knowing the right figures will basically help you but it all takes time and needs your patience.
Understanding how to value your start up is very important, with out it you are basically throwing your money away. Knowing the right figures will basically help you but it all takes time and needs your patience.
Yes, cliché but true — valuing a startup is more art than science. At the end of the day, the value of a startup is determined by how much the market will accept. Having said that, as an investor, you’d want to attract quality deal flow and outstanding entrepreneurs by maintaining a good reputation. Which means you have to play fair and value the company reasonably.
Thank you for this very informative article. It is can be rather easy to valuate an existing business as you have data and figures to look at. With an idea or new business you can only go on what the potential revenue might me.
[...] researching this week’s contribution to the “How to Value a Startup” series (part 1, 2, 3), I came across two similar calculations from two different thinkers in the startup field. [...]
You're right. Valuing a startup is an art and we attempt to approach this with a “collage method.” That is, we'll look at different aspects of the business to form a clearer picture of the value of a company.
Sure, one can always seek professional help, such as accountants and lawyers, to value a company. But this would incur costs and is more appropriate when all parties are committed to close the deal. Some people just want to find out a ballpark figure before making their next steps, and we try to deliver this information to those who are interested.
Of interest, accountants tend to undervalue startups whereas lawyers tend to overvalue.
Start ups are probably the most abstract of all businesses to review in order to determine if they have the potential to become a viable and thriving entity. As the article states, it's no place for lazy investors. You really have to know what you are looking at and how to look at it before deciding if you'll throw your money behind it. It's like looking at a 20-side die. You can look at it and see all of the numbers, but it just takes time and patience.
[...] is not an impossible task. It just takes work, and we believe that it is best achieved through a “collage” of valuations. Each valuation might, on its own, be inadequate to give the true value of the startup, but when [...]
Asking the question “What is the value of the startup?” is akin to asking “What is the meaning of life?”
Haha. Classic