Valuation is the key performance indicator for success

Company Valuation — Art & Science

Axel Schultze
Sep 1, 2018 · 4 min read

I started my first company 35 years ago. We raised several rounds from Venture Capital Firms and valuation was one of the hottest topics. I started my second company 18 years ago using the world’s first crowdfunding platform and raised 5 rounds until we decided to make an IPO. Company valuation was an epic discussion among investors and us. Both companies started and got funded in Europe. Valuations are much more an art than a science.

Then we went to Silicon Valley and started yet another company. All my successes in Europe did not count and the valuation discussion was fundamentally different. Here in Palo Alto it was all about math and science. We raise money in the hardest time in the valley — right after bubble crash and September 11. Yet, we got a 2 million seed round done. That was absolutely amazing. Then several venture rounds as we very successfully competed with our 2 Million in the bank against the two 800 pound gorillas with 68 Million and 72 Million pre bubble cash in their banks.

Valuation at science level

Unless you have an amazing track record, investors look for hard core revenue. If you are more than 6 to 9 month in business and still have no bookings most investors would pass regardless. The luxurious timelines in Europe where you get all the time to perfect your ultimate algorithms or manufacture your physical law breaking hardware to perfection — DO NOT exist at all in Silicon Valley. “Market Born products is the objective. Get the idea to market and then book revenue, the build it and grow as fast as you can. That makes a perfect data set for valuations.

A good valuation standard is:

8 X Forward Looking Revenue

Assumptions:
1) you have some 3 month revenue that completes the picture
2) You have a complete and diverse founders team that works full time for the company otherwise you can’t even get funded at all
3) A clear vision and direction where you going to take the company. If you do not, take 2x off of your multiple. If everything else is OK we talk about a 6 X multiple.
4) Having a compelling and easy to understand business model — preferably with a disruptive element that turns your market on its head.
If not, take another 2X off of your multiple. If you found a highly disruptive business model add 2X to your standard multiple :) NOTE we are not talking about disruptive technology — we talk about disruptive business model.
5) Demonstrate exceptional growth roughly 1% per day or more. If not, you can take 2 to 3 X off of your multiple.
6) Fully fleshed go-to-market strategy and visible execution. If you are considered hot in the market and one can see it due to the sentiments in the web, that is great. If not, take 2X or more off of the multiples.
7) Investors expect you have plausible and scalable business processes in place. Meaning it is easy to place an order, buy a product, return the product, get support, find documentation and more. If not take 3X off of your multiple.

Defend Your Valuation

You will need to work hard in defending your valuation. Blah blah blah what others have or did is a real bad idea. Tell people what you have, what your story is and why there is no way of loosing your game. Make sure everything you say is plausible.

Worst case valuation

Don’t be ashamed if your valuation after going through the above list is not worth deck you prepare. Most first time entrepreneurs have that issue. Simply go back to your drawing board and fix what needs to be fixed. Relentless execution is what top investors expect.

Emergency Exit

If you need money NOW and can’t fix all your problems, you may find investors who have no clue and invest anyway. A large portion of Angel Investors are first time investors and burn through their money rather quickly. For rather weak companies, it appears to be the only way to get to the next round. Good Idea? No — You get screwed in the next round. in 99% of the cases, that next round is most likely a down round. A down round is when the follow on round has a lower valuation than the previous round. All previous investors, including the founders get further diluted but don’t have an upside. It’s the opposite, they lose part of their value. Everybody pays for the previous mistakes. The outcome: everybody lost and you look like a fool.

Plan your company wisely

Don’t rush, writing your code or building some prototype. THINK before you start. It’s very easy to burn through cycles of time and then raise capital under pressure. Look for a mentor you can trust before you look for anything else. Always remember: 90% of startups fail. Now you know why. It’s not the bad idea or stupid customers or greedy investors — it’s simply bad planning. Some investors say: “If you can’t plan the start — you will never get to plan a big business”.

Axel Schultze

Written by

Serial entrepreneur, now on a mission helping entrepreneurs from around the world build extraordinary companies, go global and contribute to our society.

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