Valuation
What is a fair valuation?
A fair valuation balances company ownership with potential execution value. When the entrepreneurs and employees own too little of the company, there is no longer an incentive to work hard.
Understand that a good investor group will never want to cut down good entrepreneurs or an employee force to less than 1/3 of company ownership. In this day and age, the employees are the ones who will make the company execute. Without them, the investors are left with a piece of paper, and a whole lot of unusable raw materials. Investors are looking to own part of a huge pie, not the majority of a small pie, and certainly not a failure.
Pre-money? Post-money? What are they?
Pre-money is the value of your company before the investment is made. Post-money is the value of the company after an investment is made.
POST-MONEY = PRE-MONEY + INVESTMENT AMOUNT
How should I calculate valuation?
The potential of the opportunity, the management team, and how much value the current investors bring combine to determine valuation.
The only fair way to determine this is by a 3rd party transaction. But since we don?t invest in a company that is about to be bought, we have to take similar metrics, and apply them to a particular company.
When using another company to base your metrics, however, you?re falling into the success bias. Only the companies like yours that have survived are available to use as metrics. And of those companies that have survived, only the successful ones are the ones you will have access to the metrics and numbers. So realize that while you may be along a similar path as an E-bay or an Amazon, there are hundreds of other companies on your same path that have died off. Investors have seen a lot of similar companies, and have invested in some of the failures. Their point of view will be tinted towards a holistic view of the space.
What is the key element in the value of my company?
The company is worth part of the potential of the company, but mostly, its value lies in what you have already achieved.
The more risks you eliminate, and the more you achieve, the greater the valuation on your company pre-money. Between the idea and the execution, the execution is much more valuable. With the web, ideas are spreading rapidly. When you sit down with an investor, you can be confident that 5 other meetings are being held at the same time, with the same idea being discussed. Thus, the idea has little value, it is the execution which matters most, and execution will determine which group will be successful.
