We’ve all seen ABC’s Shark Tank. We’ve imagined ourselves standing in front of Mark Cuban, pitching our idea and scoring the deal of a lifetime. We’ve nearly thrown our remote at the TV when a budding entrepreneur screws up a deal. We’ve been great backseat entrepreneurs.
At some point, whether it be in front of Mark Cuban, or your rich cousin Sal, as an entrepreneur you will be in those shoes. Will you be able to stand by your business valuation?
Valuation: The art of assigning a monetary value to your start-up business or idea. What is it worth exactly?
I know you’re hoping I will now give you the exact formula for valuing your idea, so you can sew this part of your business plan up and drop it on your investors with the absolute confidence in your accuracy. You triple checked the math, after all.
That’s not going to happen.
Valuing your start-up is one of the most inherently contradictory and subjective pieces of your business plan, and has arguably the highest impact on your success given that you make a deal to get your feet off of the ground. The dangers of overvaluing or undervaluing are not minimal, and not to be ignored. So, let’s get to it. Let’s get you that valuation.
Before I get into useful formulas and resources to use to dial in your value, there are a few things that need to be considered.
- The prospective investors in your idea ultimately decide the value of your business, not you.
- You decide the value of your business before you pitch your idea, and you prove it.
Therein lies the contradiction. You have gone over your assets, your market potential, and every other little diamond and piece of gold that your brilliant idea entails. You’ve added all up time and time again. You show the math in your business plan. Your business is worth $100,000. You’re positive of it. You’re willing to give up 30% of your business for $30,000 today.
This idea, this business, this dream: it’s your baby. But the person(s) you are pitching your idea to has no stake in that baby. Not yet. Their money is their baby. They’ve worked hard for it, and they have a proven track record of success. You probably don’t. Yet. They see that you have no sales yet. Your business is so far just an idea and maybe a provisional patent application that you have no guarantee of ultimately securing. Regardless of how sure you are of your worth, your idea is a risk with real consequences to their wallets. They love the idea, they have faith in you, and they will be happy to help you. They’re willing to offer you $30,000 for 60% of your business today.
So how do you prepare to offer a reasonable valuation that will give you the best shot at success?
Let’s do our homework and see what Mr. David Berkus has to say about start-up valuation.
Mr. Berkus offers a simple method that can be looked at from the perspective of both the investor and the entrepreneur. He suggests that specific monetary values can be added to specific criteria that the idea or business possesses. Does your business plan present a “sound idea”? Do you have a prototype? Do you have a competent management team? Do you have any reltionships, future contracts, or past sales history? Each of these questions can be answered with a specific dollar amount according to Mr. Berkus, and this dollar amount can present a reasonable value to your start-up.
Of course, an investor may disagree and discount the values you assign, however this is a great starting ground. I will direct you to the source on this one: The Berkus Method
By now, you’ve realized that assigning a valuation to your business truly is a bit of an art. By taking the time to use popular methods such as The Berkus Method, you can set yourself up for success in the art of valuation.