By Thomas Hong
The Market Valuation of a business can sometimes be determined by measurable parameter such as revenue, profits, comparable competitors, etc. However the market valuation of a startup is not easy to determine as measurable parameters such as revenue and profits are sometimes non-existent in the startup up and or early stage of a business.
There are some parameters that can help with the perceived value of a startup company.
Investors will assign certain value of a startup by valuing the experience, knowledge and expertise of the Founding Team. Thus it is very important to quantify specific measurable accomplishments of the principals; not just what they work on but rather what they achieved. Examples are specific technologies/products developed, measurable revenue growth, profit improvement, and market leadership position gain.
Measurable intellectual property is very pertinent to the value of a business. Identifiable patents, exclusive technology licensing or other parameters that provide a company technology advantage will increase company value.
EXAMPLES OF IMPROVING VAUATION OF A STARTUP
Below are two startup companies that I have provide consulting to help fund raising
A startup company was developing $100K+ document scanning product. The funding documents emphasized the expertise of the Founders, the technical advantages of the product, absence of the similar competitive product on the market and the projected huge market potential of the product. The company was struggling to get funding.
I spent time talking with the CEO/Founder, studied the funding documents and discovered some very valuable information that greatly enhanced the valuation of the startup company.
The CEO (to be identified as XX) had previously managed several research projects at a very large company. One of the project under his management was the document scanning project which the large company spent $5+ million and 5+ years on research. This research project was aborted. XX saw the huge market potential and also knew that a small amount of engineering effort would result in finishing the design of a product that could be sold. XX negotiated an exclusive technology licensing arrangement with his employer before he quit to start the new company to complete the design of this product. None of these were in the original funding documents. After I revised the funding documents to include this “$5 million research value”, the company found many interested investors and received funding to build the product and grow the company.
A startup company was developing noise cancellation technologies. The funding documents emphasized the expertise of the Founders, the large number of patents that it owned and technical advantages of their technologies, and the projected large market potential of the technologies. The company was having difficulty getting funding at good valuation.
I spent time talking with the CEO/Founder, studying the funding documents and discovered some very valuable information that greatly enhanced the valuation of the startup company.
The CEO (to be identified as YY) had been CEO of an earlier company that raised $30+ million from VCs to develop noise cancellation products. That company was closed before bringing products to the market. However YY saw the value of the substantial resources expanded to the IP development. He purchased all the patents for exclusive use in exchange for a small portion of the equity in his new company. I revised the funding documents and added this information that $30+ million of research development had been spent to obtain the portfolio of patents that the new company owned. This immediately increased the “Perceived Valuation” of the company and greatly helped in raising funds from VCs.