There are some standard valuation method like discounted cash flow valuation, projected future valuation, or relative valuation against a company's history or against its competitors.
Please refer to Sterns University Prof. Damadaran's site, its an amazing collection of the lessons and spreadsheets to try it out too. Especially don't miss his Google Valuation spreadsheet.
I love the aritcle by Motley Fool on valuation. Here goes.
Also look at my startup valuation from last week
Friday, September 23, 2005
Saturday, September 17, 2005
Startup Advisor
I serve as an advisor to couple startups and get calls asking about advisors -who should be one, how to compensate them, what to expect of them, how to go about finding an advisor etc etc etc.
My advisors:
First, I had an amazing set of advisors for my first startup Coola, without whom I could not have taken off. They helped me find the enterprenuer in me. I am so thankful for them.
I cannot even list all of them here. Three people who helped me from start to finish were Paul English(then GM of Intuit Boston), Piyush Patel (CEO of Cabletron) and Ashish Gupta(VP of Amazon).
All of them were enterprenuers who built companies and sold to a large company.
All of them were very busy people who cared and found the time for me, who did not intimidate me for my dumb questions and set a high threshold for me to strive for, most important they have set role models for being an enterprenuer and a startup advisor.
Who were not my advisors:
I had my share of people who were patronizing. I met 120 people within 40 days when I raised my first $1MM venture money, when I met all kinds of people. There were people who asked me to pay a chunk of my company to come raise money for me and do all kinds of jobs they thought I could not do.
The key to being a successful enterprenuer is to learn to differentiate good people from not just bad, but mediocre people - for advisors, investors and employees.
Why do you need advisors:
They are like your sounding board, the can guide you, they can give you different point of views. This is needed when you try new things which is always in a startup and you want direction, help, validation. Then you decide and make decisions on the right course and execute on it.
From my experience of advisors, I find you need them for different purposes:
1. Advisors as your mentors
2. Advisors as industry experts
3.Advisors as sounding boards
4.Advisors as future potential team.
This is particularly important if you have a huge potential and want to scale your management team and someone you respect can come as an advisor and can get the confidence and synergy and come on board as your management team or future CEO.
How not to select advisors:
I have made my mistakes too. Here we go!
1. Don't go after someone just because they have a brand name in your industry. You can try someone with a brand name, but the variable should always be trust, respect and compatability.
2.Don't go after someone for his or her network
This always fails. My advisors all had great networks and made great intros, but that was not the reason to ask them to be your adviosr in the first place.
I found someone as my advisor for his association with a potential customer (large one) and wasted a lot of time as the underlying trust and respect was not built and he did not understand my company nor share my passion.
Advisor compensation:
I never paid my advisors. I do feel bad about it. They would not take any percentage of the company, which would have been trivial for them anyways. Writing this blog and helping other enterprenuers is my way of givig back what I got from my advisors.
The industry norm is 1/4 of 1 percent for advisor. Don't start by offering it. See if the relationship works both sides and then make the offer.
I offered all my advisors a choice to invest in my company early on and many took it. This way they get to participate in the upside of your growth when you exit.
Getting started with advisors:
This is the most common dilemma startup founders have. Do I just go ask someone to be my advisor? What would they say?
I would suggest that you make sure you like, trust and respect this person first. Then you can approach them and see if they get excited about you and your company.
Please start with a compensation plan. Advisors who start with asking for one and a startup founder starting offering one are not focusing on the trust in the relationship.
Some people are very structured and may ask the demands on their time and what you expect. Have an open honest discussion and it will help build the relationship or to decide if this person will not workout as your advisor.
Interesting Advisor Attempts of mine that failed to make by Advisory:
In the initial Coola days, since we were building out a horizontal software platform, we had no focus. I thought of it as a standard setting game. So I went to W3C and tried to get an advisor to help me out. Obviously, I found a great person, but there are no synergy in our passion towards mobile technology and Coola and it did not work out. The lesson was to wait before declaring some one as your advisors.
Similarly, I had a VC who was a great advisor. I decided to keep him as a friend and informal advisor than pitch to him for money as our styles were different, but he was a great sceptic and sounding board. I did not get an advisor, but got a friend.
Interesting Advisors and Rare Sources:
One of my investors wanted to get someone on my board when I was not quite ready instead that person became a friend and advisor and eventually invested his money too.
My advisors:
First, I had an amazing set of advisors for my first startup Coola, without whom I could not have taken off. They helped me find the enterprenuer in me. I am so thankful for them.
I cannot even list all of them here. Three people who helped me from start to finish were Paul English(then GM of Intuit Boston), Piyush Patel (CEO of Cabletron) and Ashish Gupta(VP of Amazon).
All of them were enterprenuers who built companies and sold to a large company.
All of them were very busy people who cared and found the time for me, who did not intimidate me for my dumb questions and set a high threshold for me to strive for, most important they have set role models for being an enterprenuer and a startup advisor.
Who were not my advisors:
I had my share of people who were patronizing. I met 120 people within 40 days when I raised my first $1MM venture money, when I met all kinds of people. There were people who asked me to pay a chunk of my company to come raise money for me and do all kinds of jobs they thought I could not do.
The key to being a successful enterprenuer is to learn to differentiate good people from not just bad, but mediocre people - for advisors, investors and employees.
Why do you need advisors:
They are like your sounding board, the can guide you, they can give you different point of views. This is needed when you try new things which is always in a startup and you want direction, help, validation. Then you decide and make decisions on the right course and execute on it.
From my experience of advisors, I find you need them for different purposes:
1. Advisors as your mentors
2. Advisors as industry experts
3.Advisors as sounding boards
4.Advisors as future potential team.
This is particularly important if you have a huge potential and want to scale your management team and someone you respect can come as an advisor and can get the confidence and synergy and come on board as your management team or future CEO.
How not to select advisors:
I have made my mistakes too. Here we go!
1. Don't go after someone just because they have a brand name in your industry. You can try someone with a brand name, but the variable should always be trust, respect and compatability.
2.Don't go after someone for his or her network
This always fails. My advisors all had great networks and made great intros, but that was not the reason to ask them to be your adviosr in the first place.
I found someone as my advisor for his association with a potential customer (large one) and wasted a lot of time as the underlying trust and respect was not built and he did not understand my company nor share my passion.
Advisor compensation:
I never paid my advisors. I do feel bad about it. They would not take any percentage of the company, which would have been trivial for them anyways. Writing this blog and helping other enterprenuers is my way of givig back what I got from my advisors.
The industry norm is 1/4 of 1 percent for advisor. Don't start by offering it. See if the relationship works both sides and then make the offer.
I offered all my advisors a choice to invest in my company early on and many took it. This way they get to participate in the upside of your growth when you exit.
Getting started with advisors:
This is the most common dilemma startup founders have. Do I just go ask someone to be my advisor? What would they say?
I would suggest that you make sure you like, trust and respect this person first. Then you can approach them and see if they get excited about you and your company.
Please start with a compensation plan. Advisors who start with asking for one and a startup founder starting offering one are not focusing on the trust in the relationship.
Some people are very structured and may ask the demands on their time and what you expect. Have an open honest discussion and it will help build the relationship or to decide if this person will not workout as your advisor.
Interesting Advisor Attempts of mine that failed to make by Advisory:
In the initial Coola days, since we were building out a horizontal software platform, we had no focus. I thought of it as a standard setting game. So I went to W3C and tried to get an advisor to help me out. Obviously, I found a great person, but there are no synergy in our passion towards mobile technology and Coola and it did not work out. The lesson was to wait before declaring some one as your advisors.
Similarly, I had a VC who was a great advisor. I decided to keep him as a friend and informal advisor than pitch to him for money as our styles were different, but he was a great sceptic and sounding board. I did not get an advisor, but got a friend.
Interesting Advisors and Rare Sources:
One of my investors wanted to get someone on my board when I was not quite ready instead that person became a friend and advisor and eventually invested his money too.
Friday, September 16, 2005
Startup Valuation - For an Enterprenuer raising venture money
This is a huge topic. My experience comes from couple areas - raising money for Coola and my work from Harcourt evaluating tech companies for aquisition during the dot com boom.
Most important point I learnt about Startup Valuation is that its different based on perception of who you are, what is in it for you and of course changing market around the startup.
We'll revisit this topic again, for now lets focus on the basics.
Here I am going to focus on the Enterprenuer raising money!
Your startup valuation depends on
a) primarily on you and your core team. Its your word about the promise of how you will build what your promise to the projects your list in your bplan. So, if this is your second or third startup, your previous history talks for you. In my personal experience, I think a first time Enterprenuer can display a higher degree of passion and dream higher (in my case it was because of the ignorance of several difficulties of the business world).
b)Your product (or service). VCs may ask to see a prototype and send you to work on technology, which may take time away from company building and raising money. In all fairness it helps them to understand your product better and if you do it right, you can use this to build your core team and scope your product right.
My only advice is not to build a scaled down version of the product without real customer input.
During my early Coola days, I went to several prospective customers to validate the market and their input helped.
So, if yours if a complex tech product that needs money to build you can build a prototype that shows some functionality visually for the investors to see what the customer will potentially see.
c) Customer and Revenues Yeah, right! How do we get them before the product and team for which we need the money in the first place.
Didn't I tell you in the beginning this is a chicken and egg game :-))
You can take your idea (in powerpoint or GUI of product screen as prototype) and show to potential customers and see if you can get some interest.
This can help immensely with scoping the product, especially not going down the road of adding features without considering usability from the customer perspective. More important is that it will help tryout diffferent ideas for your real business model.
If its a software product, what kind of lisencing arrangement may work for your market?
Its easy to start as an ASP instead of a lisenced software for a startup, but enterprise customers won't like it.
Did I tell this is was one of the advices I got in the early Coola days and since Web businesses were booming, I chose the ASP route and went to Web businesses to put Coola Buttons to get their site content to Palm Pilots via Coola. We had 500 sites signup ad go live, including Boston.com, CIO.com, Wharton, even Palm.com, but very few very revenue customers. Then 1 year later we moved to enterprise market with a lisence of Cool Servers, then we got real customers and money!
d) Your market What market are you operating in? There are some valuation range for businesses operating in Financial markets vs Manufacturing market. This can be arrived a logically by looking at your market size, and potential estimates of how big your company can grow.
So, its common for enterprenuers to go about describing their business as "Google of blah blah space". It has an additional advantage. It helps the investor understand your business model and dream of how big you want to be.
Thats the basic list for first round investor perceptions of valuation.
e) Competition This is more applicable for second and further rounds of funding. The valuation of your competition in public markets or in their rounds of funding helps set the range for yours for the same reason of market size. It also serves as a comparable metric for what your company can achieve.
The trick in the early stages is to try and position yourself uniquely so such comparisons are not easy. Of course all Enterpreneurs would swear that their idea is very unqiue and as no competition. I did too :-)) I still do ;-))
f) Geography I don't know how much logical reasoning is behind this one. I heard repeatedly from investors that I would get a higher valuation from West coast than east coast. I had my lead investor from east coast and closed my Series A at $5Million pre money and was happy with it.
ok, See you next time, I'll write about valuation from the corporate buyer perspective then.
Most important point I learnt about Startup Valuation is that its different based on perception of who you are, what is in it for you and of course changing market around the startup.
We'll revisit this topic again, for now lets focus on the basics.
Here I am going to focus on the Enterprenuer raising money!
Your startup valuation depends on
a) primarily on you and your core team. Its your word about the promise of how you will build what your promise to the projects your list in your bplan. So, if this is your second or third startup, your previous history talks for you. In my personal experience, I think a first time Enterprenuer can display a higher degree of passion and dream higher (in my case it was because of the ignorance of several difficulties of the business world).
b)Your product (or service). VCs may ask to see a prototype and send you to work on technology, which may take time away from company building and raising money. In all fairness it helps them to understand your product better and if you do it right, you can use this to build your core team and scope your product right.
My only advice is not to build a scaled down version of the product without real customer input.
During my early Coola days, I went to several prospective customers to validate the market and their input helped.
So, if yours if a complex tech product that needs money to build you can build a prototype that shows some functionality visually for the investors to see what the customer will potentially see.
c) Customer and Revenues Yeah, right! How do we get them before the product and team for which we need the money in the first place.
Didn't I tell you in the beginning this is a chicken and egg game :-))
You can take your idea (in powerpoint or GUI of product screen as prototype) and show to potential customers and see if you can get some interest.
This can help immensely with scoping the product, especially not going down the road of adding features without considering usability from the customer perspective. More important is that it will help tryout diffferent ideas for your real business model.
If its a software product, what kind of lisencing arrangement may work for your market?
Its easy to start as an ASP instead of a lisenced software for a startup, but enterprise customers won't like it.
Did I tell this is was one of the advices I got in the early Coola days and since Web businesses were booming, I chose the ASP route and went to Web businesses to put Coola Buttons to get their site content to Palm Pilots via Coola. We had 500 sites signup ad go live, including Boston.com, CIO.com, Wharton, even Palm.com, but very few very revenue customers. Then 1 year later we moved to enterprise market with a lisence of Cool Servers, then we got real customers and money!
d) Your market What market are you operating in? There are some valuation range for businesses operating in Financial markets vs Manufacturing market. This can be arrived a logically by looking at your market size, and potential estimates of how big your company can grow.
So, its common for enterprenuers to go about describing their business as "Google of blah blah space". It has an additional advantage. It helps the investor understand your business model and dream of how big you want to be.
Thats the basic list for first round investor perceptions of valuation.
e) Competition This is more applicable for second and further rounds of funding. The valuation of your competition in public markets or in their rounds of funding helps set the range for yours for the same reason of market size. It also serves as a comparable metric for what your company can achieve.
The trick in the early stages is to try and position yourself uniquely so such comparisons are not easy. Of course all Enterpreneurs would swear that their idea is very unqiue and as no competition. I did too :-)) I still do ;-))
f) Geography I don't know how much logical reasoning is behind this one. I heard repeatedly from investors that I would get a higher valuation from West coast than east coast. I had my lead investor from east coast and closed my Series A at $5Million pre money and was happy with it.
ok, See you next time, I'll write about valuation from the corporate buyer perspective then.
Thursday, September 15, 2005
Start of a Startup - How to focus and move ahead in the early days
I have a new passion called Moomli (http://www.moomli.com) meaning "My Only One Moment to Liberate India". Its a social enterpreneurship venture to help grassroot charities in India.
Moomli (http://www.moomli.com/) helps Indians abroad send charity greeting cards to their family in India and gives the proceeds to the charities. The cards are all real cards with a real story behind it.
Today I want to share a dilemma every enterpreneur faces everytime with a new startup.
It is "Where to start and what to focus on?".
The beauty of a startup is that you can run very very fast and work beyond your known limits and its so much fun. I have written many times about Team Building . So, assuming you have a great team, there are going to be lots of ideas, real good ones.
So, every startup team faces this sooner or later - what to focus on.
I believe, the same idea given to different teams with the same initial resources can lead to totally different companies because its the team that executes that is going to run faster and set directions based on the team culture.
So, it would be a good idea early on to start a process by which you decide to focus your energies collectively. It could be a discussion forum or friday get togethers whatever works for your team.
During my startup, Coola, thanks to the advice of Piyush Patel, I had a working plan with some target dates even before I raised venture capital. We kept updating this and it gave us a sense of accomlishment as we reached some goals, made us look back laugh at our own naiveté for some others. We updated them as we had major direction changes. I also got a similar plan from my different teams - CTO, Marketing, Sales etc as we grew, and this helped sync up their efforts towards a common goal.
Please note, this does not have to be a beauracratic process, but putting a plan in writing helps.
The problem is in the very early days when team boundaries are not set and everyone is full of ideas. I could't find any other way around this, you the founder have to be the bad cop and hear it out and make decisions so that in the short term you can go after the low hanging fruits and have some synergy towards where the company is headed long term.
Moomli (http://www.moomli.com/) helps Indians abroad send charity greeting cards to their family in India and gives the proceeds to the charities. The cards are all real cards with a real story behind it.
Today I want to share a dilemma every enterpreneur faces everytime with a new startup.
It is "Where to start and what to focus on?".
The beauty of a startup is that you can run very very fast and work beyond your known limits and its so much fun. I have written many times about Team Building . So, assuming you have a great team, there are going to be lots of ideas, real good ones.
So, every startup team faces this sooner or later - what to focus on.
I believe, the same idea given to different teams with the same initial resources can lead to totally different companies because its the team that executes that is going to run faster and set directions based on the team culture.
So, it would be a good idea early on to start a process by which you decide to focus your energies collectively. It could be a discussion forum or friday get togethers whatever works for your team.
During my startup, Coola, thanks to the advice of Piyush Patel, I had a working plan with some target dates even before I raised venture capital. We kept updating this and it gave us a sense of accomlishment as we reached some goals, made us look back laugh at our own naiveté for some others. We updated them as we had major direction changes. I also got a similar plan from my different teams - CTO, Marketing, Sales etc as we grew, and this helped sync up their efforts towards a common goal.
Please note, this does not have to be a beauracratic process, but putting a plan in writing helps.
The problem is in the very early days when team boundaries are not set and everyone is full of ideas. I could't find any other way around this, you the founder have to be the bad cop and hear it out and make decisions so that in the short term you can go after the low hanging fruits and have some synergy towards where the company is headed long term.
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