What is the Value of a Startup?

You Founded a New Company, You Want to Grow

For example, you have an idea for a business plan. You have even raised some money left and right, and you have turned your idea into a working system. But now you want to grow it further by getting investor support, you want to turn it into a unihorn. You even want to know what your company is really worth before you get an investment offer.

Yes, maybe you are not going to sell your company, but the offer you receive, and therefore the capital increase, should create synergy in your company. On the other hand, you have to transfer some of your shares in response to the offer you receive. In order to determine the amount of shares you will transfer, you need to estimate your company value correctly.

Perhaps with a few small maneuvers you can increase the value of your company many times over.

Life Stages and Valuation of Companies

There are different models for determining the value of a company around the world. However, most of these models focus on sales volume, turnover or profit.

However, a company has 5 different life stages; birth (existance), childhood (survival), adolescence (success), middle age (take off), and maturity (resource maturity) (Neil C. Churchill and Virginia L. Lewis, 1983, The Five Stages of Small Business Growth, Harvard Business Review).

On the other hand, McKaskill T. (2009) summarizes these processes as seed (first 18 months), early stage (up to first 30 months), expansion (profitable period), turnaround (product obsolescence), late stage (new product), procurement period (outsourcing technology, acquiring companies).

This is why the "Two Stage Free Cash Flow to Equity" model in particular is designed as a two-stage structure, with rapid growth at the beginning followed by steady growth. A three-stage version of this model is also available (https://financetrain.com/one-two-and-three-stage-fcf-calculations/). However, this model is essentially based on sales volume.

However, reaching customers is the biggest handicap, especially in the first phase of the venture. Worse still, the desired level of talent cannot be reached as there is not enough capital. At this point, how will the venture be valued?

The first stage of startups, birth, is actually the project stage. The evaluation of the project will of course be based on the business model, feasibility study and market analysis. A business model that is not based on innovation and discovery is very unlikely to be successful.

The biggest danger here is the possibility that the customer forecasts in the business model and the earnings forecasts based on it are actually based on hope. On the other hand, these models are usually based on the assumption that the company will not face any competition or environmental adversity. However, market analysis clearly reveals potential competitive conflicts. Therefore, the evaluation of a project initiative should be both quantitative and qualitative.

3 Key Dimensions: Capability, Customer and Equity

So, can a clear assessment be made in an initiative that has passed the project phase? Of course, the main criterion here is directly proportional to how close the established enterprise is to the period of self-sustainability. Basically, a business is formed on 3 basic dimensions; talent, customer, equity. The entrepreneur is in the middle of this triangle as a manager with the organization he creates. The amount of sales/production adds real volumetric depth to this plane.

Capability is the ability to produce a service or good. In general, it consists of basic components such as production licenses, machinery park, organization, human staffing, corporate culture, infrastructure, raw material concessions, production recipes/procedures, licensing agreements, patents obtained. The existence of a system that works smoothly and creates customer satisfaction increases the value of initiatives. However, all these parameters have their own percentage contribution to the total value. For example, it is important for a company to have original patents, patents created with reference to another patent, and useful industrial designs. On the other hand, the value of patents in providing a strategic advantage is important. If a company has tacit knowledge that provides an advantage over the market, it provides value to the company even if it is not codified.

On the other hand, the existence of a corporate culture in a company is an important point. For example, when Marc Randolp, the founding CEO of Netflix, was handing over his position, he emphasized the creation of a corporate culture at Netflix as a particular achievement.

To many it seems that if there is capital, staffing the organization is a problem area that can be easily overcome. However, there are many projects that have gathered the brightest stars of the market but have failed to achieve success.

The customer is one of the most important concepts for businesses. Gaining the loyalty of individual customers, especially in technological products, requires skill. Awareness of the company, ensuring customer loyalty to its products takes up huge financial resources. Therefore, companies with established customer bases receive higher investments. When the customer becomes institutionalized, the relationship spreads over the long term with contracts. This means long-term cash flow. An increase in the number of institutional customers increases the value of the venture.

Companies with domestic equity capital are not easily affected by market fluctuations. If they have sufficient current capital, they generally do not fall into insolvency. They realize their growth internally. Therefore, investors do not seek partners for financial reasons, but for vertical and horizontal expansion. Either the new partner has a distribution channel to market the goods or services produced or has limited raw material resources. On the other hand, companies with products that create synergies with the company's products are important investment opportunities for such ventures.

Amozon.com Example

The best example of this is Amazon.com in Jeff Bezos' investment portfolio (https://www.investopedia.com/investing/how-jeff-bezos-got-be-worlds-richest-man/). Although areas such as virtual reality, media, cloud computing, crafts, food, etc. may seem unrelated to each other, they are actually horizontal components that can be easily integrated with Amazon.com. Jeff Bezos can easily market them with the platforms at his disposal and distribute them easily with his logistics network.

Because of all these evaluation and valuation issues, investors work in a portfolio mentality. In other words, they take some companies with high return and high risk, some companies with low risk but which can be easily marketed. Some of these will actually fail. But the earnings from the risk-free companies finance them. On the other hand, some of them appreciate so much that they guarantee everyone's retirement.

So a good entrepreneur must keep his finger on the pulse of the market and adapt his company structure to the investors' point of view.