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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.

7 comments:

uzma said...

hiz i m an student of commerce, thnx sudha for nice sharing plz guide us more about enterprenuer concepts and application

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