How to Double Your Valuation

That got your attention, didn’t it?  Maybe I learned something from all those enlargement offers in my email after all.

Now, let’s get down to business.  I re-learned something last week.  Focus sells.  Duh.  I'll be specific.  Last week I saw two remarkably different pitches, both from companies with great technology.  One sold the generality of what they could do, telling a Big Story.  The other told a Focused Story about an existing customer base they were going to serve better. .They explicitly avoided  in the pitch any mention of where else their technology might apply.  That was the voice over in the conversation around the pitch. All other things were equal  -- limited management team, pre-launch, working alpha. 

I struggled with the Big Story Company, befuddled about who would really use this.  I jumped out of my chair (metaphorically) to chase the Focused Story, because I could envision so many more uses beyond the first beachhead market.  VCs are great at imagining a big Future, but most of us want an anchored Present.  The Big Story Company was hoping for a valuation $10M pre-money.  The Focused Story already had a term sheet at $20M when we met.

There is an enormous temptation in startups to think and talk expansively about a long-term vision centered on the technology of the Company.  That vision often includes the word enable as in we will enable … That’s your first clue.  Enable is one of those value-halving words.  So are Discover, Context, Create, and Build. All those words really say, The proof of value is left to someone else. That applies equally to the valuation. The proof of value is left to someone else because we can't articulate it. 

Companies started by technologists routinely fall into this trap. (I mean both business and engineering technofiles, BTW)  They don’t start with the intent of solving a specific problem. They start with the intention of “leveraging” a specific technology.  The fact that the technology is a piece of many potential futures seduces the team to think they have a big opportunity.  It is uncomfortable for the team to commit to a market because they don’t know the end user.  There are two solutions to this. Turn inward and build technology, or turn outward and recruit people who do understand the solution.  It is dilutive, but if it doubles your value, you can’t afford not to do it. 

Years ago I was on the board of a company that had phenomenal technology for building predictive models from text or data.  The team had identified potential applications in CRM,  online advertising, search, database marketing, customer support, and others.  The CTO referred to the product as a bolt-on brain, because it made many existing applications much smarter.  The problem was that the technology was 10% of any given solution, even though it was the piece that differentiated the rest of the system. Capturing the other 90% required domain expertise not present in the team.  The Company never went deep, straddling several potential markets.  They were eventually acquired for the team and tech, not for the book of business it created.  It was an unsatisfying outcome for nearly everyone.  It was positive, but vastly under the potential.

So how do you double your valuation?  Pick one application; serve one type of customer and be in that business.  Show how you can conquer a specific set of competitors by virtue of the technology, but don’t be in the technology business.  If you can persuade your investors that the first beachhead is attainable and interesting, you will get credit for subsequent applications and the big, horizontal play. Tell a story that shows you understand who your customer is, how to get to them, and why they will buy or use your product/service. Show how powerful the technology and team are, but stay on message about the focus.  Let us imagine the Future.

• Don’t enable – solve
• Don’t provide context – provide conclusions
• Don’t ask customers to build – ask them to use

Technology is raw material.  Create finished goods.

Enhance your value with this Vi@gr@ for startup companies. Your partners will love you for it.

Comments

[jim Forbes]

Peter
Amen, brother. Why don't BDchools teach 'how to set realistic evaluations?"
Best wishes

Jim Forbes

[Joe Agliozzo]

"limited management team, pre-launch, working alpha" + "had a term sheet at $20M when we met" = "BUBBLE"

As a 1999 era venture funded entrepreneur, I feel like I've seen this movie before, and I know how it ends.

However, I do agree with your position in the post, which I would restate and condense as "get real and serve an actual customer".

How this equates to a $20M pre money for a an alpha product with no revenue and no actual customers, especially in this era where you can build an "alpha" for less than $50K is the strange part.

Lot of execution risk for a $20M pre isn't there? and a deal like this implies a MINIMUM $200M exit (without more funding - unlikely), how frequent are those deals in the last couple years?

[Paul Jardine]

Is there a feeling on the part of the VC, that if you tell a focused story, they can add value, by seeing the big picture. If the company is pitching the big story, then it's stepping on the VCs toes, and not giving them an obvious way to feel like they're helping.
The focused story; 'we're just looking at this small market but obviously we'd be over the moon if you think our simple little application can do so much, you VCs are just so smart, why didn't we think about that. I guess that's why they pay you the big bucks!'
$20M vs $10M. Just so long as you're sure it's not vanity....
I don't disagree that focus is good, but it's also better to say less than you know, and make sure you say less than you think the VC knows.

[anthropocentric]

Peter,

This is the first blog posting of yours that I have ever read - I just happened to stumble onto your blog via a Google search.

Wow! Keep up the great work. Your posts are fascinating and you are an excellent communicator.

I wish you all the best.

[Steve Sarakas]

This the best blog I have yet found, for several reasons. I have been studying VC firms for the past couple months. Now I have a dumb question...or is it a comment? Everywhere I go, they never fail to mention how many bazillion plans, summaries, pitches they all get every month. It must be true. But here's what - I'm bootstrapping a startup, now I can see this exploding, and for the first time I began to think seriously about EF'ing.

The problem is, I can't help but get this picture from all these VC websites that there's typically a grad student sitting at a desk somewhere just throwing stuff into baskets, going "Oh sure, another one! HA! Here's a guy that wants to do 100M in four years - yeah sure. Here's another guy that has a cure for cancer and already has FDA approval, yeah sure. Seen one, you've seen 'em all."

I can't imagine there's really that much cynicism, except I already got splashed with it when I approached one group. Good grief, they told me they are watching a hundred opportunities. I didn't even finish disclosure. My mind is stuck in bootstrapping, it's a lot for me to post this. Thanks for allowing me to.

[Michael]

Reply to the previous post - the best thing you can do is to keep making progress and increase your company's value. My mantra when dealing with VCs is 'don't let the bozos drag you down', as Guy Kawasaki has put it so aptly ;-) If they had the skills to innovate and invent they would probably start their own businesses, so don't get discouraged when someone tells you that your business doesn't have a future. Get nervous if everyone does... Yes, VCs ARE getting hundreds of proposals, but that's the nature of the game. They are probably also missing out on good deals and kick themselves later on - someone must have said no to Yahoo, Google, eBay, etc. - they don't tell you how often they stroke out, do they?

Raising money is a bit like playing poker. First, make sure you've got a good hand in case you have to actually show your cards. Then go there and tell them as much as they need to know. Be focused (of course) and don't embellish or sugar-coat. VCs can smell BS 10 miles against the wind - they do this hundreds of times a year, you do it maybe once every few years - don't try to fool them. But don't provide too much information either - the more you give them the more reasons they find to say no. Forget about the business plan - focus on the POC first. I've had VCs and angels openly admit that they don't read business plans and they don't care that much as long as you know what you are doing and know your market. It's more important to get your first customers and get a good team together. Which is very hard, because the team you put together in the first 6 months will define the DNA of your company - your values, your identity, your chance of success.

Try to get a buzz going and talk to seveal VCs at the same time. VCs love to invest in deals others are interested in as well (btw, Donald Trump seems a master of creating the 'buzz'). Once you get a term sheet DO NOT STOP LOOKING! That's a huge trap many entrepreneurs fall into - it's psychological because we all hate raising money since it distracts us from actually getting any work done. VCs love to drag things out as long as you let them - the more desperate you get the better. The best way to get a deal wrapped up is to have someone else waiting to invest, so keep looking until the check is in your hand.

Finally, make sure you raise enough - don't be paranoid about giving up equity - the worst thing that can happen to you is to run out of money and having to raise more before hitting your milestones. Nobody wants to throw good money after bad money - this kills many start-ups. Anyway, I also recommend Paul Graham's blog - he provides great insights in how 'the game' is being played and how to build successful startups. Good luck!

[Steve Sarakas]

Great, thanks. Had a look at PG's blog.

[Jeremy Fain]

Peter, in the value-halving list, I would have added "empower". It seems that the conclusion of this pretty interesting, and very well written, post could be that companies best valued are customer-centric companies rather than techno-minded ones. This is not so new after all.