Frontier Home Business Week

Home Contact Us Business Week Archives
Frontier
Advice and Columns
Navigation
 
 
SMART ANSWERS
By Karen E. Klein

1.19.00
What Price a Startup?
Valuing a company that barely exists is a subjective process


Q: I hope to launch a property portal site early in 2000. How do I value my startup? I have financial projections for the first two years of operation, but I'm not sure what range of valuation I should insist on. Should I use an advisory firm for this process?

— O.S., London

A:  Attaching a value to a company that's not yet operating is very tricky. Your projections, even if they are based on solid comparisons and thorough research, are really just educated guesses. Whether your new company succeeds or not depends on the strength of your product, your market potential, and perhaps most important, the experience and dedication of your management team. The risk associated with financing your new company also is a factor in calculating the company's "pre-money" valuation, the amount it's worth before a venture capitalist or angel investor takes a stake.

There are no hard-and-fast rules for valuing a startup. "There are some Internet startups going into the funding process with valuations of $2 million, or even $6 million or $8 million," says Peter Cowen, an investment banker and president of Peter Cowen & Associates, based in Westwood, Calif., "but they have strong management teams in place, proof of concept, and a very compelling composition with a great upside." Strategic alliances that give a company early outlets for its products or a marketing advantage, as well as a strong management team with relevant industry experience, also plump up an early business valuation, he says.

CANNED NUMBERS. Stuart Skorman, founder and CEO of San Francisco-based HungryMinds.com and founder of REEL.com, says that earnings projections are nearly meaningless unless you already have a strong track record in your industry. "Venture capitalists that you present your idea to are the best, most qualified people to objectively set the value of the company, based on the criteria of what they think is the potential of the overall business," Skorman says. You can hire a professional business-valuation firm to crunch some numbers for you, but unless the consultants have extraordinary cachet, professional investors will likely ignore their estimates. "The venture capitalists that are looking at new companies all day, every day, are usually familiar with comparable businesses, and they are the best qualified to put a value on your startup," he says.

You can purchase valuation software and try to come up with a "canned" number for your company. A better use of your energies is to write a credible business plan that conveys your excitement about the company, says Colin Gabriel, a mergers-and-acquisitions professional and author of How to Sell Your Business and Get What You Want. "Beauty is in the eye of the beholder — and so is value," Gabriel says. "Present your business plan to as many venture-capital investors as is practicable. Those who are interested will propose investment terms, and they won't be much influenced by an asking price. The market is enormously competitive among investors for attractive opportunities, and the fear of losing the deal to a competitor will drive investors to propose attractive terms, if they are interested."


Have a question about running your business? Ask our small-business experts. Send us an E-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Want to post a reply? Let us know what you think.




Top

RELATED TOOLS

E-Mail Story



RELATED ITEMS

How to Succeed in Business without Really Trying

Little Us! Courted Madly at Our Second Financing Round

Raising Money Is Like Theater — You Better Have Your Act Together


Smart Answers Archives






Business Week Home Bloomberg L.P.
Copyright 2000, Bloomberg L.P.
Terms of Use   Privacy Policy

Bloomberg L.P.