Unicorns (companies with valuations over 1 billion) and well-funded companies have been all over the news recently. The question then is, how does a company achieve this sort of value.
Understanding the fundamentals of what will really impact your business value goes a long way. It helps to make sound strategic decisions prior to approaching investors. This month, I provide you with a cheat-sheet on how to start getting investor-ready.
Don’t sweat the small stuff
When dwelling on a small issue, ask this – is this going to materially impact the value of the company. This is especially true for newer set ups where all the smaller elements are not necessarily tied up – and waiting just adds to frustration and inertia. For valuation, the multiplier effects of the smaller things are usually minimal.
Have a clear answer to “why do you do what you do”
Understand the fundamentals of what really will impact your business value. This helps you to make sound strategic decisions prior to approaching investors. Unlocking intrinsic business value is necessary step for investment.
Real estate decisions are more complex than they appear
Simple questions like, “should the land on which the business is run be owned by the entrepreneur, the business or a third party” are often asked. The first question to ask is - is the land going to be used as collateral to raise funds? If yes, then the land has to necessarily be on the books of the business. If not, then the land can be leased by the business from the owner of the land (even if it is the same as the promoter of the business).
Use the “Others” or “General” categories prudently
“Others” can be a very useful head for new set-ups where small details can be clubbed for a quick valuation assessment of undecided items. They are essential to the business no doubt and need to be sorted out before you start. But, can be done while valuation negotiations are underway.
Cash is King – always
The alluring net profit line and margins which drives a lot of entrepreneurs really means very little if the cash in the business (sitting on the balance sheet) is at an unhealthy level. The two go hand in hand but the cash figure is what you really need to look out for – because that will give you your reserves to weather any storms.
A valuation assessment is just a starting point
Finally, keep in mind that the on paper valuation and the value you will agree to rarely coincide in any way. These valuation exercise are a starting point for discussions and the actually value most new businesses have is more intangible in nature. A Discounted Cash Flow Method (DCF) does take into account a lot of things but it is a very optimistic view on the business. On the other hand an asset valuation will lead to an as-is, value-free assessment.
Investors into new businesses usually invest in the entrepreneur more than in the business. The reality is that a solid product backed by management confidence, trust, honesty and past record for performance in other businesses is what actually clinches most deals – not the excel sheet numbers.