Are we worth our valuations?
I’ve noticed something interesting lately as Conversio has been on the lookout for potential acquisition targets in the last couple of months.
Let me set the stage first. We’re a profitable business, reinvesting all of our surplus funds to power our momentum. We have grown well enough since launch that we have solidified our standing, brand and reputation in our ecosystem, which in turn means we have access to capital should we need it.
With that backdrop, we have sporadically been exploring potential acquisitions as a way to leverage our access to capital in favour of continuing our growth. When looking at potential targets, we have invariably been quoted what I would term as ”venture valuations”, meaning the kind of valuation that you would see in a venture funding round.
Our perspective of this is however to value a business based on their profitability today, along with the synergies that we can unlock once we merge teams/products / assets. So while we do consider the future value of the investment, it has not been close enough to the quoted ”venture valuations” for us to get close to pursue an acquisition.
Part of me understands why this happens. Entrepreneurs are inherently optimistic and future-orientated, so when we value our business today, we are considering what it could be worth tomorrow. This is particularly the case during the earlier stages of a company’s lifespan, where the founder(s) still have great enthusiasm for this thing they’re working on, and they can imagine a version of the future where their company is worth $x.
The part that I think some entrepreneurs over-estimate though is their attachment to the valuation of their last round.
If I raise a Seed Round at a $1m valuation today, then my company or idea is not yet worth $1m. Instead, investors have essentially kicked the can down the road, as there is too little information available to do a proper GAAP-based valuation today. What they are in agreement about is that the business could be worth at least $1m in future. But I must still execute to earn that valuation.
By all means, If I were trying to raise a subsequent round of funding tomorrow for this same company, I would want to reference our last round (at $1m) and progress we’ve made since then. But if I were to try to sell my business tomorrow, the likelihood is that I won’t get someone to pay that $1m. There are of course outliers to this, but it’s precisely that kind of bias that seems to have become a generally-accepted truth.
Are we worth our (last) valuations? And how attached are we to those valuations?
Writing the above line now, I realise how silly even I feel about this… Conversio raised a Seed Round on a $4m cap a little more than two years ago now.
How did I come up with that valuation? It was a bit of a thumb suck based on what I thought investors would be willing to pay. Which means whatever our valuation is or isn’t today should probably not be based on that figure. :)
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