February 25, 2008 at 02:06How to evaluate a startup?
The other day, I came across in a foreign blog on a formula that allows you to assess the commercial prospects of a startup.
Young and ambitious people are haunted by the success stories of youtube.com and others. It would seem - come up with a service that will make mankind happy, create a website, develop it in anticipation of a reputable investor, and it’s all about the hat. In the wake of global enthusiasm associated with social networks, each registered user is a contribution to the treasury of the total cost of the project. But how to determine success potential in advance?
The venture capitalist David Sliver in the book "Smart Startups" offers this arithmetic design:
Perspective = Solved problem x Elegance of solution x Management experience
Each of the components can be evaluated in points (maximum value - 3.0). The larger the product, the higher the chances of success. If the result is below 5, then the idea is most likely doomed to failure. It is better, of course, if the points are not set by the owner himself, but by external experts who are knowledgeable in the matter.
Owners, in my opinion, are rarely able to adequately assess the value of their possessions, and if it comes to intangible assets, then the tendency to overestimate takes on an unprecedented scale. If in previous years this concerned mainly inventions, the authors of which drew a bunch of zeros in their imagination, now the creators of startups have come to replace them. What do the three classic valuation approaches tell us?
Costly approach.As the name implies, the totality of direct and indirect costs of creating an asset. If everything is done wisely, then here are the costs of office, furniture, appliances, and actually the creation of the product (the fee of third-party developers or the salary of their own staff), plus the actual costs of advertising and promotion. Probably, it’s worthwhile to use some coefficients here, as in calculating the value of trademarks or inventions, but the area is so new that I just haven’t met any specific methods.
Comparative approach.Surely someone was already selling something similar somewhere. In other words, we need some proportionate counterparts that the deals went through (namely deals, because the value of the offer in this area can exceed the wildest assumptions). The unit of comparison is often taken as the number of registered users. Although, in my opinion, this is a rather abstract concept - it is much more useful to find out the size of the active audience and its structure.
Income approach.Obviously, the key question is whether the project will bring the expected profit, which in turn must be recalculated from the value of the future to the current? Most sites make money on advertising or additional services, while the risk that expectations will not be met, in my opinion, is significantly higher than in real business. The role of competitors and such concepts as audience loyalty is too great, sometimes even a change in the ideology of the resource can negatively affect profitability indicators.
Short summary:in determining the real market value of a startup, I would first of all try to assess its prospects and ability to predictably generate return on invested capital, while taking a very critical approach to the predicted indicators and taking into account the retrospective (obviously, for a very young project, the prospects are much more foggy than who has proven to be stable working). But I would "divide by two" the rumors about sales for the fabulous sums of such projects, if only because there was some excitement that provoked investors to unreasonably overpay. The cost of creation costs can be used rather as a certain indicator of the quality of the finished product - after all, standing things do not appear from the air by themselves.
Young and ambitious people are haunted by the success stories of youtube.com and others. It would seem - come up with a service that will make mankind happy, create a website, develop it in anticipation of a reputable investor, and it’s all about the hat. In the wake of global enthusiasm associated with social networks, each registered user is a contribution to the treasury of the total cost of the project. But how to determine success potential in advance?
The venture capitalist David Sliver in the book "Smart Startups" offers this arithmetic design:
Perspective = Solved problem x Elegance of solution x Management experience
Each of the components can be evaluated in points (maximum value - 3.0). The larger the product, the higher the chances of success. If the result is below 5, then the idea is most likely doomed to failure. It is better, of course, if the points are not set by the owner himself, but by external experts who are knowledgeable in the matter.
Owners, in my opinion, are rarely able to adequately assess the value of their possessions, and if it comes to intangible assets, then the tendency to overestimate takes on an unprecedented scale. If in previous years this concerned mainly inventions, the authors of which drew a bunch of zeros in their imagination, now the creators of startups have come to replace them. What do the three classic valuation approaches tell us?
Costly approach.As the name implies, the totality of direct and indirect costs of creating an asset. If everything is done wisely, then here are the costs of office, furniture, appliances, and actually the creation of the product (the fee of third-party developers or the salary of their own staff), plus the actual costs of advertising and promotion. Probably, it’s worthwhile to use some coefficients here, as in calculating the value of trademarks or inventions, but the area is so new that I just haven’t met any specific methods.
Comparative approach.Surely someone was already selling something similar somewhere. In other words, we need some proportionate counterparts that the deals went through (namely deals, because the value of the offer in this area can exceed the wildest assumptions). The unit of comparison is often taken as the number of registered users. Although, in my opinion, this is a rather abstract concept - it is much more useful to find out the size of the active audience and its structure.
Income approach.Obviously, the key question is whether the project will bring the expected profit, which in turn must be recalculated from the value of the future to the current? Most sites make money on advertising or additional services, while the risk that expectations will not be met, in my opinion, is significantly higher than in real business. The role of competitors and such concepts as audience loyalty is too great, sometimes even a change in the ideology of the resource can negatively affect profitability indicators.
Short summary:in determining the real market value of a startup, I would first of all try to assess its prospects and ability to predictably generate return on invested capital, while taking a very critical approach to the predicted indicators and taking into account the retrospective (obviously, for a very young project, the prospects are much more foggy than who has proven to be stable working). But I would "divide by two" the rumors about sales for the fabulous sums of such projects, if only because there was some excitement that provoked investors to unreasonably overpay. The cost of creation costs can be used rather as a certain indicator of the quality of the finished product - after all, standing things do not appear from the air by themselves.