How to value a company that isn't running?


4

If all you have right now is an idea how do you value a company? See I want to build a software package and I have been doing research on my main competitors and such but at the end of the day how do you put a valuation on a company that has no product built therefore no revenues.

The reason for asking is because I will with all luck be pitching my ideas to possible investors and want to do what I can to both make sure I don't over inflate or under inflate the valuation. I want to know that if I ask for X dollars for X piece of the pie and can back up my reasoning to the investor.

Any help is appreciated.

Aaron

Investment Valuation

asked Feb 1 '10 at 16:37
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Aaron
124 points

6 Answers


3

The easy answer is that unless you have some sort of technology with you, source code or some patents the value is 0,-

I don't think the value of your company is of any importance at this stage.

VC's certainly wont look at that but rather at the potential of the market, how big a share you will potentially be able to get of that market and how you are going to get it.

The second you start to actually develop the product it will begin to gain value but it is counterproductive IMO to look at valuation of the idea of a company.

answered Feb 1 '10 at 22:28
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Thom Pete
1,296 points
  • +1. Answer to "how do you value" is "You don't." Ideas are free. Everyone has ideas. – Jason 10 years ago
  • Yup. Execution power is the real currency. – Thom Pete 10 years ago

3

I was there about a year ago, it's not a science. It's like business plans you don't know how much profit you going to make but you just throw in some numbers with educated guesses.

A very rough guide to accomplish this:

  • Make your business plan first
  • Calculate the sales, expenses, salaries, cost of every little thing and profit
  • Now divide the profit by 2 (because almost all the time you'll be so naive on this process, assuming this is not your 4th startup )

Now you are looking at your annual profit, based on that number ask yourself how much would you want to sell the company? That's your value.

This was the theory in real world but it doesn't matter at all! What does matter is how much money you need to get it up an running. Set a time limit such as 1 year for being ramen profitable. Now multiply it with 1.5

That's your number to build up your company. If you are looking for a little investment big money sort of area it generally doesn't matter if you give away 70% of your company or only 5% in that stage. Don't be greedy after all other 30% will be a lot of money anyway. Obviously one of the most crucial things is being in control that's why you can focus 51%

  • Basically it all comes down to how many people out there to fund you?
  • Negotiate as much as you can
  • It's pointless to negotiate for $1M when you all need $250K to launch (still you can make an agreement about on going cash injection ).

So it's just like selling products. It's not about product's value it's about what your customer (investor ) is willing to pay? But it's important to calculate the value of the company so you can have ammo during pitches, and I believe only way to accomplish this is a good and realistic business plan.

answered Feb 1 '10 at 18:55
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The Dictator
2,305 points

2

Early stage valuations are very imprecise, it's a lot about gut feeling and trust in many things -- not just trust in the business plan, but also in the founder, in the market vertical, and in the global economy outlook.

fm has some good advice. Additionally, you absolutely want to network with other entrepreneurs in your local area and follow websites like TheFunded, TechCrunch and others to get a feel for valuations in your market.

The 3 main things I would focus on today if I was pitching investors today are:

  1. Before pitching, build a market analysis around Lean Startup methodology, and get clear validation of a market need.
  2. Before pitching, build a prototype implementation, and get at least a handful of customers on it.
  3. When pitching, grab as much money as you think you can get away with. There may not be another series of financing available.

The above is clearly motivated by my belief that venture capital is pretty hard to come by right now.

answered Feb 1 '10 at 22:15
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Jesper Mortensen
15,292 points
  • +1 for prototype implementation. It's really effective. – The Dictator 10 years ago

0

At this stage, you need to worry more about your business than what it's worth. The best thing to do is build a financial model that takes your financials out 3-5 years. This shows that you understand what it will take to build a profitable business.

Once you have that, then doing an evaluation will be a little easier. Don't get me wrong, you do need to have a rough number but that's only for a sanity check at this point.

One thing to keep in mind is that VC's will already have a number in their head as to what it's worth. That number will be pretty hard to change. Their evaluation of your company will be dependent on your financial model and how well they think you can execute.

In general, VC's don't read business plans. They look for three things:

  • Executive Summary
  • Pitch

  • Financial Model

Work on getting those perfect and the evaluation will naturally come out.

answered Feb 2 '10 at 00:26
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Jarie Bolander
11,421 points

0

This was posted today, it's really relevant to the question: http://www.avc.com/a_vc/2010/01/valuing-stocks-today-and-tomorrow.html

answered Feb 2 '10 at 02:10
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Gabriel Magana
3,103 points

0

Usually companies are valued by some multiple of something -- often $sales, sometimes inventory, sometimes registered users, etc. Knowing nothing about your company, let's value it at 3x sales, which is kind of in the middle of the road (sales is a reasonable metric for a B2B product company; most B2C online product companies use users; a service company will use a lower multiple).

So what will your sales be? (Or users, or inventory, etc.)

Don't even try to raise money until you can answer that question in some reasonable way.

Hopefully your research has given you some reason to think you can answer this. If not, do more research.

Then, as fm says, you need to know how much it'll take to get you started. That'll tell you who you need to ask for money. Need $$$millions? VC. $$$hundred thousands? Angel. $$$ten thousands? Friends and family. If you fall in the third group, then mostly you want to ask for something that your friends and family will be comfortable taking, since they mostly want to help you. Value your company so that it works out right and is vaguely defensible by the metrics above. If you fall in the second, don't worry, the Angel won't try to take too much, use the same valuation. If you're in the first... then you need a lawyer.

answered Feb 2 '10 at 12:33
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Wade Armstrong
181 points

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