Starting Y
Starting Y

Episode 21 · 4 months ago

How Much is My Startup Worth?

ABOUT THIS EPISODE

“Two guys and two laptops in a garage are usually valued at 2 m US$ pre-revenue”Bharat Kanodia, Founder and Chief Appraiser Veristrat LLC

Our Intro is based on Quantum Jazz’s piece “Orbiting a distant planet”, published under Creative Commons

Our Guest:

The Host:

  • Jörn is a podcaster, startup scout, consultant and entrepreneur, who is based in Frankfurt, Germany. He has a background of more than 12 years of management consulting but spends most of his time to help international investors and corporations to find, cooperate and invest in startups in Germany, Austria and Switzerland. He hosts an English startup podcast, covering the German startup scene (https://linktr.ee/startupradio) You can learn more about Jörn “Joe” here: https://www.linkedin.com/in/joernmenninger/ 

You can suggest questions here, use #startingy

Twitter Michelle: https://twitter.com/salutemichelle

Twitter Jörn: https://twitter.com/JoeMenninger

This is a starting why podcast. Here we ask entrepreneurs, actors, investors in the native and artist on the why, why they are doing what they are doing, what motivates and drive them and why can't they stop? We will start in five, four, three, two, one, hey, guys, hello and welcome back to starting why. Today you're listening to a now they interview with Joe, and today I do have a guest. Hey Bo. How you doing? Hey Joe, how are you? Thank you so much for having me Chote. My pleasure. Where you locate it? I am in beautiful, Sunny Northern California, right next to Silicon Valley. That looks good. One question. Did you already have no earthquake today? Not yet, but it is still early in the day. Okay, I see us, you see and we talking for very special reason, because here at starting why, we are working on the mental frame work of Entpreneurs, stop going to be startup pounders and investors, and today you are here, my guests, because we would talk about the different values office startup and how you could evaluate a start of right. That is correct act. I mean, there are so many ways to evaluate a startup. You know, the best way is call the rule of thumb method, and you want to know what a rule of thumb method is. Maybe before we do that, we could shortly talk a little bit about you, who you are and what are you doing, and that we are not just randomly pick this topic. You're right. Yes, yes, makes sense. Okay, tell us a little bit about you and what you doing for a living. So I am a valuation expert, and that means is I tell founders and company owners what their companies are worth. So you know, founders of companies are always looking to raise capital, could be dead or equity, and before they do that they need to know what their companies are worth. Or, on the other side of the spectrum, if a venture capitalists or a private equity buyer is looking to invest or buy a company, they need to know what their investment is worth, and the first step is to come and talk to me. So that's what I help people with. Okay, just assume now I just bumped into your office. I say Hey, I'm Joe, I have a thought of how would you approach that? I will say fantastic. I have you questions for you. The first question is, do you have revenue? Yes, fantastic. Have you raised capital? No, okay. Do you have profit? Yes, okay, if you have revenue and if you have profit, that is great. Why do you need a valuation? I want to have additional investments. Okay. So, yes, I can help you with this. You have revenue, you have profitability. You have not raised capital before. Why do you want to raise capital? For an expansion? What would you expand to? You looking to expand into new markets, as a new customers, or offer more products to the same customers? Full simplusity, let's say, the same product but in different geographies. Not like different markets, like approaching different companies, but also different geographies. Got It? Okay, makes sense. Yes, I'm happy to do the valuation for you, and you know, the way we can do the valuation is we will value...

...hundred percent of your company and then you and your investor can decide, based on how much capital you want to raise and can raise, how much of your company you will have to give away. That sounds pretty good. And now let's get a little bit out of this little flight and start thinking about what startup pounders should bring along. And I do believe, since I made it very, very easy for you, because I do have revenue, and I already do have profits. I do believe most startups do have some type of revenue, but actually most of them in the at least in the early stages, they won't have any profits, maybe even for some time. I'm not sure if Huber or work have at a big profitable even though they are multi building dollar companies. Can we talk a little bit about what you first wanted to tell us about the rule of bump and then go through a few decisions, like a decision tree, how startup founders could get a first idea of how to approach the problem, how to tackle the problem. Yes, so the rule of thumb in any startup is if a startup is two guys and an idea working out of a garage, that is worth anywhere between one to two million dollars. They don't need revenue, they don't need profit, they don't need a product. But too smart guys with credible credibility, if they're looking to build a startup that's worth anywhere between one to two million dollars. Now you are far ahead of that. You have revenue, you have profit. So in your case it becomes a little more complicated and we will have to run something called a discounted cast blow analysis, only a business where we're looking at the cash flow your business will get is a potential buyer for the next two, four, five, ten years and present value that cash flow to today and whatever the summation of that present value is. That's the value of Your Business and basically that is, I will not say, and easy method of valuation. We also know this here in Germany. Basically, what we do here in Germany we not only take the cash flow but we also deduce all the taxes from it. So basically that's when you get here in Germany, very, very, very much simplified, a company valuation in the cash flow after tax. Bass in Germany called attention, very simple name at tracks. We had FAFA, which is actually not two different from a discount of casow approach you just talked about. But I do believe everything that has no revenue but potential and everything that has no profit, that is really, really hard to evaluate. Right, oh very much, so, very much so it's, as I tell people, it very much is a valuation. is a dark guard in our dark room and a black black box. I had a great professor at university and he always told me to evaluate is to compare, and he always had this I'm not making this up, he really said it. It's like you're comparing your partner, you Wif your domestic partner, your boyfriend, you girlfriend, by just having them next to other people. And that's how it evaluate. So every time you have a company that does similar stuff, like we work, you can say you could point at them and say we work at this and this valuation. We're doing some things different, but basically you already have like a house number about the size. How do you approach a problem where you don't have, let's say,...

...at least a profit, but there's a big potential? That is usually the question. But start ups, right, I mean startups, usually don't have any venue, they don't have any product and they don't have any money, but they still need to attract investors and customers and employees, and they do all that based on valuation, which is in turn based on their future or their prospects. And the way future and prospects work, since none of us can actually see into the future, the best gage I have for proxy of their future is their history of consistency. What they have done with consistency in the past is the best gage for what they will continue achieving with consistency in the future. I see. So that is always one of the reasons. People from wellknown startups, people from wellknown companies, they do get a better better. No one hundred percent certainty. There's no one hundred percent certainty in life, but the better maybe a few percentage point higher probability to actually get money because they can always show look, there's a track record, I did this there, I did this there. That's one of the reasons. Right, correct. Correct. So say, for example, if you want to open up an e commerce store and you are a former employee at Walmart or Amazon, you have a pretty good chance of getting funding. But if you are a former nurse or a doctor and you're looking to build a e commerce website, you probably will not get fundy. Yeah, that's unless you're you're looking for a healthcare start up. Right, correct, correct, unless you are looking for a healthcare start up. Precisely so that means the people valuing the companies are looking at what you know and what you've done in the past. That is one indicator. But also we talked about the potential. Some people talk about option fury here like it's an option and this and that. Do you also subscribe to this Allah? How? How would you take into account the potential of a company? We have now, the founders, they have a little and to t they have some good ideas, where they already have a track record. And how would you include like the business there? The Business Joe, at the end of the day, is the people. So if the people who are running the business they have a track record and they have experience and they have the zeal and the knowledge to make the business into a success, the business will be successful. The business only legally is a standalone entity. Otherwise, business is just the people that makes up that business. Very wise words, very wise words. So basically, if there is a founder out there, they can already Google and get some ideas, but would you recommend to them first talk to professional before they start raising banter capital or when they get the first term sheets, that they then talk to professional? Total disclaimer here. You should at least talk to a lawyer about that, not about the valuation of the company, but about all the legal constructs, all the legal terms you subscribing in this contract, because it can really, really hurt you in the end very much. So couldn't agree more. You know, the first starting point, Joe, is collecting good people who you get along with, who you believe in and they believe in you to work with you on a start up. And if you have collected of...

...thoughts and collective consciousness, you will create a company that attracts more other similar people who have a parallel thought pattern, and the more you are successful in doing that, the more successful your company will become. I see, I see. That is going Bil bit into the right to off corporate culture. Can you also take this into count like as a soft fact for evaluating a company? I know, tricky question. I'm sorry. Corporate Culture is kind of think of it as a major ingredient in a dish, like salt. Salt is a major ingredient in a dish. If it's in existent or if it is too little or too much or too right or too wrong, you will know immediately if it's perfect, the dish will taste perfect. You don't think about salt when the dish taste perfect. You only think about salt when the dish does not seem to have the right amount of salt. So the culture is kind of like salt. MMM, I know, I know that's an awesome way to understand this and most of the people out there will be by now smiling because I guess you've listened to some of my other podcast because I tend to talk a lot about food there. Food is really nourishing the soul. It's not nourishing your body, is nourishing your soul. We've been talking now about fifteen minutes about startup valuations and what goes in there. Can you talk a little bit about why the matter and how accurate such a valuation could be? Well, one thing I can tell you for sure that all evaluations are incorrect, but there are degrees of incorrectness. There are some valuations that are less incorrect and there are some valuations that are very incorrect. You want to get a valuation that is less incorrect. So there is no such thing as an accurate valuations. If anything, they're all incorrect. Are All inaccurate. You just hope and pray that your valuation is less incorrect. That's why you're talking about sometimes about valuation opinions. Right, valuation is very much an opinion, and you know no one's opinion is incorrect, right. Everybody's opinion is their opinion. You cannot say your opinion is incorrect because that's their opinion. It's not a fact. Facts are incorrect or correct. Opinions are always wrecked. And let us go back to the question why those valuations matter. Because, as you said very, very early on, like two guys in a garage maybe with a two apple computers and their coding and coding and awesome product is there at the end. So basically, at the beginning, let's say they're valued at two million, again, some investment and then they go on and then they do have a finished product but with no big revenue. What will be like steps for that, you would take their getting to a valuation opinion of such a startup when they're looking for something like a series a investment to really get scale, to really get their tool rolled out. Yeah, I mean such a startup that you know they have a product but they don't have any revenue. They need to first find product market fit. I mean, you know, everybody can create a product in a vacuum, but somebody at the end of the day needs to buy that product and the...

...only way you know who or why or when they will buy that product is by understanding who the customer is and that's what I mean by product market. For Ninety nine percent of the startups they go out of business because they are unable to fight their optimum product market fit. So it's totally not easy to do that. I think everybody who's in startup business totally understands that. But do you see a value in having people already signed up or on a weight list to check out the problem, to be Beta tested? You see a value, not necessarily in the valuation itself, but also ask maybe the curry in the dish? Yeah, yeah, most definitely. I mean, you know it's very important. I mean product and revenue is most important, and you know without that you can't make anich out of salt. You know, just culture. You know it is not a dish. You know, you still be the ingredients, you know, the meat and the potatoes and the vegetable of the rice whatever, and that's the product and that's the customers, as the employees, and that's the investors. They all going together and create this dish which is really put together with the culture that helps all these people interact with one another. What else would you look at? Especially, I do believe it's easier to really evaluate. Be to see thought ups that directly sell to customer, where the product has a price and you can already see the first successes of selling something. But they are also be to be companies out there that really need a long breath for that. Is that something we talked to the right investors and then they say yeah, okay, we understand that and we give you some run way to do that, or what if your experience there between the bet be and the BTC startups at that stage? In frankly, I don't think it matters if it's be to be or be to see. At the end of the day, it's people interacting with people, and if you're good at interacting with people, if you're good at handling people and understanding their problems their needs and your business is set up to solve their problems or issues or their needs, then you have a good company in your hands. HMM. And it all comes down to you have a team, you have a good product and you have at least some customers already buying. And best would be if you have a list of like tenzero people who've already signed up and want to be right from the start on your platform, using your tool using your APP right. Correct. Huh? Okay, so what we learned so far? I just want to wrap this up. Basically, you have to show some type of tracker record, you have to be one or two guys, you have to have one or two laptops and basically have an idea so you can rate first funding and they cheekly. Then you go on and meet to produce you product, but also make sure that it's really something the market wants to have. Right to sell it to a people signing up to it and best to make people pay for it already very early on. Correct, Joe. I just put in a youtube video in the chat that I had produced about eight months ago, and that one talks about...

...what it takes to bait a shark, as in kind of like shark tank, what it takes to create a company and find investors and get them to invest. You know, if you want to put this in your show notes. You know. I think your audience will benefit from this video. I see you've analyzed more than eight hundred deals and can you give us a little wrap up in something like five to ten minutes? Would you recommend there? The first thing in a startup environment is especially since you don't have any revenue, you don't have any product, you won't have any employees. So the only thing left for anyone to evaluate is you, the founder. So you know, the most important thing in a startup is the founder or the founding team. If they are credible, they know what they're doing and they get along with each other. If they don't, or if they don't have credibility to work together, nobody is going to invest in their company. The second thing is this track record. I mean do they have any traction? Have they had any revenue or have they do they have any users or paying customers? If they do, then that is also a leg up, and I would say good is to have users, but better is still having paying customers, even though, admittedly, it's usually pretty tricky to get somebody to pay for something like a very early Beta version of something which usually, I would say, doesn't necessarily work one hundred percent as you want it very much. I mean it's great to have chicken, but it's even better to have roasted chicken. Still sticking with food, I like that one. Okay, what would you recommend? Everybody who's listening to this right now, admitting that a lot of people, like more than half listening to this podcast, are actually based outside of the US, and that does not only include Germany and Canada. My suggestion would be don't try to build a product for everybody in the world or your local market. Try to build a product that a certain niche people could use globally. So a small niche people, say tenzero people, could use but they could be living in the anywhere in the world. If you have a product like that, then you truly have a business that scalable globally. Now how you scale that business? That depends on has you grow and as you expand your company and find the product market fit. But if you have a product that serves a small niche of people, ideally who are scattered globally, that's a great company to invest in. And why the scattered globally? Because then you could sell your product to somebody in Guatemala or Peru or Hong Kong or Germany or Czechoslovakia or check republic, I mean, it doesn't matter. But you're going for that minute audience in different parts of the world and of course it maybe a little bit tricky to really reach them right correct. Huh, I see, but that's also something you should have accounted for in your planning, because it's also important not only to half like a good product, to have some people to pay for it, but also to have any idea how to get the next clients on right of course. Of course. So basically everybody who'd like to learn more, we will think down here in the show notes your profile, because I do believe you shared a lot of links with me before plastic and like your website, your youtube channel...

...as well as I do believe you are also a contributor to the ink magazine. Right. Yes, I am. Yeah, what do you like to write about there? I can to meet people at ink magazine have been very kind to me. I can pretty much write about anything I want to write about. Also, curry, right, about cooking nice. I mean, as long as it's, you know, related somehow to business and something that you know, people can learn from, I can write about anything. Pretty cool. I like that job. Yeah, yeah, they've been very nice to me, so you know, I'm most grateful. Great. So let's end this recording with the mental high five to the guys at ink magazine. Absolutely, Oh, nice one. Yeah, great, it was just apply to having you here Joe. Thank you. It was a great pleasure and I appreciate you having me. Totally my pleasure. Have Good Day. By Bye. Youtube.

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