Five Key Points to Consider When Valuing Your Early Stage Company

How much is your company worth?  Your answer to this question will directly impact your ability to raise capital.  An owner would be wise to educate him/her self on the topic of valuation prior to pitching potential investors.  Here are five points to consider.

•         There is no direct correlation between how much capital you have injected into your company and your current valuation.  Unfortunately, we frequently hear this justification for lofty valuations.  I don’t know a single investor (founder or outsider) who wants to believe their company is worth less than the amount of capital they have invested, but often it’s the truth.  If you make the argument that your company is worth “x” or “x+y” because that is the amount of capital invested in building the business be prepared for potential investors to walk, simply because they perceive you as naïve.
•          Let’s face it, if you are a pre-revenue company, one could make a compelling argument that the asset (the company in question) has little or no value.  Liquidity is a key element when determining valuation, and securities in pre-revenue companies are highly illiquid.
•          You’re intellectual property is, more than likely, worth less than you think.  Intellectual property only has value if it’s being monetized, whether by the company that owns it or a competitor.  Here’s the rub, a patent is, more or less, only an invitation to court.  Intellectual property litigation is expensive and time consuming.  Even in a scenario where a competitor is able to monetize a company’s intellectual property, unless that company has the resources to pursue legal action and recoup damages, their intellectual property might as well be used as wallpaper.    
•          Google and Facebook success stories are events that happen once, maybe twice, every decade.  Please, stop justifying your outlandish valuation by comparing your company to either.  You may be entering a huge market, with a great product or service, and a seasoned management team, but justifying your company’s value by making these comparisons is not only ridiculous, it’s hilarious.
•          If you are not producing revenue, you do not have earnings.  All tried and true valuation methods used for determining the value of a going concern, outside of the start-up markets, are hinged on a company’s earnings.  You do not have a leg to stand on if you use DCF (Discounted Cash Flow) analysis to value your company, when the financial data used is solely projected.  A lack of earnings does not automatically imply that a company is valueless, but we’ve never seen a pre-revenue company accurately project their earnings over the following year, let alone five.

Using an outlandish valuation figure is one of the quickest ways to kill a deal before it’s even begun, because it’s proof to any investor they are dealing with an amateur.  Amateurs tend to be costly to investors, and investors hate funding learning curves.  Determining the value of an early stage company is incredibly subjective.  Value is not derived solely from current earnings, asset base, intellectual property, etc; value is derived from a combination of these things.  How well positioned is the company in the marketplace?  Does the company have intellectual property?  How is it protected?  Who is the management team?  What are their backgrounds?  Do we believe in them?  Are there earnings?  What are the potential earnings?

At the end of the day, when it comes to raising capital, a company’s value will be determined by leverage; and, leverage will come from how many investors want in on a deal.  The result of having multiple parties who want to play ball is the ability to negotiate a better deal structure, and hence a higher valuation.  

Are Women Owned Businesses Better Investments?

Over the course of the past 24 months, we reviewed over 3,500 early stage investment proposals. A majority of the entrepreneurs we spoke with were men. After cutting out the fat (the business models that simply force us to scratch our heads and mutter “huh?”) and wrapping up pre-due diligence conversations, we came to a conclusion that shocked us. When equally matched (i.e. same industry, talented management team, lot’s of traction, etc), on the surface, women owned businesses will disproportionately prove to be the better investments. Before all the men out there throw their arms in the air and call us crazy, here are the seven completely unbiased observations that led us to this conclusion.

1. Women tell the truth. They lack the bravado many of their male counterparts covet. When you ask a female business owner a question, you get a straight to the point, unfiltered, answer. Often, male egos stand in the way of the “whole truth”, and much time is wasted in the process of sorting through the details. 
2. Contrary to popular belief, women are quicker at making decisions. They take ownership of what they are working on, research and understand the potential risks and rewards, and when it comes to making a “yes” or “no” decision rarely opt for maybe. While many of their male counterparts are revered for their “fire from the hip attitude”, female business owners typically use a “ready, aim, fire” approach which allows them to make clear and informed decisions. 
3. Many male business owners sign an agreement or contract, and then find any number of reasons to delay moving forward, change their mind, or run and hide. When making business decisions, women rarely suffer from buyer’s remorse. 
4. Female business owners under promise and over deliver. A woman’s word is the gold standard. When they commit to accomplishing a task, you can count on them to see it through to completion. Often, male business owners will throw out verbal commitments with little sensitivity to actually following through. Frequently, for male business owners, close is good enough. This is never the case for their female counterparts. 
5. In a “man’s business world”, many women business owners have a chip on their shoulder. This is not a good thing, it’s a GREAT thing. While this is pure speculation, we believe it pushes female business owners to be that much quicker, better, and stronger. 
6. Female business owners are “tougher” than their male counterparts. They take criticism regarding their businesses better than men. Men take criticism to heart, as if you are insulting their baby. As long as you have a woman’s respect (and she knows that you have her best interest in mind), she will take constructive criticism in stride and use feedback to push forward. Not to mention, women are better at making tough management decisions. A woman will always make the tough call (i.e. fire a key employee) quicker and with less drama than a man. 
7. Women business owners are both natural leaders and empowered decision makers. It is common that male business owners put off making important business decisions and defer to statements like, “first, I need to speak with my wife”. On the other hand, you will NEVER hear a female business owner say that she needs to discuss an important business decision with her spouse. 

To be fair, we are fans of every entrepreneur. The heart and soul of the entrepreneur is the foundation our great country was built upon; and, regardless of gender, it is that heart and soul we cherish. When it comes to raising money and speaking with potential investors, male business owners would be wise to steal a few plays out of their female counterparts’ playbooks.