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ARTICLES
Business Week "Small Business" January 19, 2000 Smart Answers by Karen Klein What Price a Startup? Valuing a company that barely exists is a subjective process Q: I hope to launch a property portal site early in 2000. How do I value my startup? I have financial projections for the first two years of operation, but I'm not sure what range of valuation I should insist on. Should I use an advisory firm for this process? O.S., London A: Attaching a value to a company that's not yet operating is very tricky. Your projections, even if they are based on solid comparisons and thorough research, are really just educated guesses. Whether your new company succeeds or not depends on the strength of your product, your market potential, and perhaps most important, the experience and dedication of your management team. The risk associated with financing your new company also is a factor in calculating the company's "pre-money" valuation, the amount it's worth before a venture capitalist or angel investor takes a stake. There are no hard-and-fast rules for valuing a startup. "There are some Internet startups going into the funding process with valuations of $2 million, or even $6 million or $8 million," says Peter Cowen, an investment banker and president of Peter Cowen & Associates, based in Westwood, Calif., "but they have strong management teams in place, proof of concept, and a very compelling composition with a great upside." Strategic alliances that give a company early outlets for its products or a marketing advantage, as well as a strong management team with relevant industry experience, also plump up an early business valuation, he says. CANNED NUMBERS. Stuart Skonnan, founder and CEO of San Francisco-based HungryMinds.com and founder of REEL.com, says that earnings projections are nearly meaningless unless you already have a strong track record in your industry. "Venture capitalists that you present your idea to are the best, most qualified people to objectively set the value of the company, based on the criteria of what they think is the potential of the overall business," Skonnan says. You can hire a professional business-valuation firm to crunch some numbers for you, but unless the consultants have extraordinary cachet, professional investors will likely ignore their estimates. "The venture capitalists that are looking at new companies all day, every day, are usually familiar with comparable businesses, and they are the best qualified to put a value on your startup," he says. You can purchase valuation software and try to come up with a "canned" number for your company. A better use of your energies is to write a credible business plan that conveys your excitement about the company, says Colin Gabriel, a mergers-and-acquisitions professional and author of How to Sell Your Business and Get What You Want. "Beauty is in the eye of the beholder - and so is value," Gabriel says. "Present your business plan to as many venture-capital investors as is practicable. Those who are interested will propose investment terms, and they won't be much influenced by an asking price. The market is enormously competitive among investors for attractive opportunities, and the fear of losing the deal to a competitor will drive investors to propose attractive terms, if they are interested." |
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