By: Andrew Maxwell
As a follow up to the Altitude Accelerator’s Growing Your Business Series this month on Business Valuation, here are a few tips to determine the value of your business before it achieves revenues. It is often necessary to attract equity capital at this stage – which raises the question – how much equity should you give up for a fixed level of investment? Many entrepreneurs are challenged to value companies at this stage, and the debate between an investor and entrepreneur is often quite negative.
Given that many VCs use the Venture Capital method for calculating a pre-investment valuation, I discuss not the process of calculating the value, but how you can increase it by increasing the value of the venture at exit. As the Venture Capital method starts from the value at exit and works backwards, increases in the value at exit are likely to result in a higher company value now. The traditional model of the venture creation process shows the sale of the business as the logical final step in the venture creation process, but I suggest that unless every strategic decision you make along the way is designed to increase this likelihood, future valuation will never be maximized.
Below are ten ways to increase the value of your company:
1) Pick the optimum team
Building the team of partners, employees and advisers to guide and operate the company is the single most important decision a technology entrepreneur will make.
2) Get Strategic suppliers
No entrepreneurial venture can develop a solution or go to market in isolation. Strategic partners are a critical element of the value chain.
3) Develop scalable technologies
For an acquirer to be interested in your business, they must believe that after the acquisition they can make more money from operating the business than you can.
4) Choose strategic technology partners
While deploying a scalable technology is critical when developing a technology solution that enhances the value of the company – the company’s choice of technology partners also influences company value.
5) Create pilot approaches to identify markets
Similar to the issue of developing technology scalability the development of a Go To Market plan for a new venture is very important.
6) Select optimum distribution partners
Developing a distribution relationship with a potential acquirer can help them understand the market opportunity and your business potential
7) Leverage your existing assets to make you more attractive
Capture a high profile customer, acquire and integrate smaller competitors into your business and acquire your technology supplier if you can.
8) Ensure appropriate legal agreements in place
Many of the initial relationships and obligations in a startup are informal, yet this informality can become an issue when external parties are looking at investing or acquiring.
9) Create third party endorsement
In many cases, it is possible to utilize the reputation of an existing organization who will endorse your business or technology.
10) Create a bidding war
Create a compelling value proposition for two parties, so that you are not reliant on one for an offer.
Overall, awareness of how you might need to make trade-offs between these factors can inform your strategic decisions and help you make those that are best in the long term. For more detailed analysis of each of these factors, click here.
Andrew Maxwell is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.
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