What is your business worth?

After “will you work for free?” the most common question I get asked is “what is my business worth?”. Neither question is framed in those exact words of course, but when someone asks for help on valuation they are asking about the value of their shares, the value of the business and the least equity they can give for investment.

The normal context for this will be trying to raise some equity finance, and I specialise in some of the hardest of all companies to work with – pre-revenue start-up technology companies. In some cases they are nothing more than a patent application and a clever man or women who has come up with an interesting idea.

There is no magic formula I’m afraid but there are some guidelines to coming up with a credible valuation for your business, and some common misunderstandings and “folk wisdom” to be avoided.

The simple truth is that a pre-revenue business is worth what you can get an investor to buy in at. And you will probably have to horse trade. The hard part is rationalising, or better, justifying your starting valuation. If you have no trading history don’t let anyone kid you into putting a lot of effort into a discounted cash flow (DCF) unless you have a 3 year supply of irrevocable, non-refundable purchase orders. The truth is that the discounts to be applied for the risk will be very high, and just by way of example if the discount is higher than 40% all revenues after the first year will be ignored. Given that a normal sales growth curve for an early stage technology business is a hockey stick, your lowest revenue in year 1 gets discounted by 40% and everything else is ignored. Probably not the valuation you were looking for.

Of course, valuation also determines dilution. This can be a very emotive issue for a business owner. I’ve known grown men turn down investment rather than let go of a few extra percentage points of the equity. In their minds there is a minimum percentage of shares they hold that they will not go below. And in some cases this is a very high number indeed. You may be better off going down the Lara Morgan route – keep your equity, fund the business another way and you’ll reap the rewards all by yourself at the exit.

To help entrepreneurs get over this mental obstacle, I like to focus on the exit. If you believe in your plan (and if you don’t, stop right here) then you can work out what the value of the company might be  in 5 years time and ask yourself how much of that value would be your ideal target exit. Not a percentage – an amount. Looking at the bigger picture puts into perspective the dilution.

Venture Capitalists have formula for working out valuations, but they don’t work for start-ups either – there are too many interlinked factors to make a spreadsheet capable of working it out accurately. For private investors the valuation is closely linked to their knowledge of the sector and belief in the exit (which is in turn linked to their belief in being able to get the business there). So the truth is no-one has the “right” answer because there isn’t one.

So where do you start with valuation?

I used to say that any technology worth exploiting commercially, where there is a sizable market and scalable business, is worth at least £1m, Used to say, because the appetite for pre-revenue technology is now so reduced that £500K is probably a better starting point. You might try to argue that you’ve done three years unpaid work (sweat equity), but don’t expect it to affect the value much. Similarly, prior investment does not necessarily set the price. Just because your neighbour invested at a £4m valuation doesn’t mean the next investor will.

What really will establish value in the business is the team that present the business plan. Do they have the experience, the understanding and the ability to deliver on the business plan, to cope with the wrinkles and deliver a meaningful (substantial) exit? If there is any evidence of commercial traction – letters of intent, early sales (even discounted) – maybe a distribution agreement or brand association deal.

Of course, once you start revenue generating the valuation equation changes, but here in the UK, at the end of 2011, finding funding for pre-revenue technology based companies is harder than ever – its a bleak winter to come whatever the temperature.


Permanent link to this article: http://www.concap.cc/2011/11/what-is-your-business-worth/

It’s all about the sales

Every working day I receive business plans and summaries – not one a day, more than that, some days 3 or 4.

Most of them are companies seeking funding. Most of them are technology companies of one sort or another. I am careful not to narrow down my definition of technology, because innovation appears in some very unlikely companies – such as the bed company I met a few weeks ago. I understand the needs, fears and desires of these companies because I’ve been there myself. And by their very nature these tend to be pre-revenue companies with much to prove.

From an investment perspective, a good indicator about a company is having sales to “real” customers. The fact that someone in the target market has committed cash to purchase the product is an endorsement. Naturally there are caveats (did they actually use it, like it, keep it), but it is a defining moment for a company. It can make the difference between getting funding and not. Even an indication of sales, such as a letter of intent, or conditional order, is better than nothing.

So it surprises me that companies with a close to finished product don’t work on an initial sale. They generally will argue that the product isn’t perfect, the marketing material/branding/positioning isn’t ready or that the sales force is not yet hired – all things they are raising money for. The truth is that this is a critical step and anything (legal) you can do to get the first sale(s) will make an enormous difference.

I met a business yesterday which had initial sales and was using customer feedback to refine & hone the product to meet their needs. These sales were not huge, but were credible and sufficient to convince an investor that there were real paying customers around. And the company has tried its product in the field and learn from this. They have no sales force. They have no marketing team. Yet, they manage to close the sales and deliver product.

Equally important to an investor is the sales projection. For most new technology companies I have seen this tends to be a hockey stick – slow growth in the first few years followed by an enormous surge in sales in years 4 & 5. There are relatively few companies that actually achieve this, and there are significant implications to this time of growth. For instance, costs can grow at the same rate, and because costs to effect such a growth in sales often come before the sales themselves, cash flow issues arise. It is not unusual to see a very detailed financial plan with specific values for sales over a number of years, yet a hazy or incomplete sales strategy to explain the growth. I’m afraid the days of taking a very small percentage of a very large market just because your product is better are gone. You should be able to demon strate sales growth from the ground up.

Selling is something that most people need to be trained to do, and without sales you have no business. This is not something you can afford to neglect or “get by” on. That first sale however can be made to an early adopter (and if you haven’t read Crossing the Chasm by Geoffrey Moore, do so!),


Permanent link to this article: http://www.concap.cc/2011/11/its-all-about-the-sales/

The Accelerator Academy


The Accelerator Academy is a new training, mentoring and investment programme for innovative start-ups and early stage, high growth businesses in the Tech, Media/ Marketing and Telecoms/Mobile (TMT) space.

The course is a 12 week part time (Monday evening syllabus, plus Mentor time and group sessions) programme for 30 of London’s highest growth potential start-up and early stage tech / media / communications businesses, with 12 successful exited entrepreneurs mentoring them. At the end of the course, participants are able to present their business for investment to seasoned angel investors, syndicates and early stage investment funds.

The course ‘market tests’ business ideas and models, and gives ambitious entrepreneurs the best chance of business success and investor readiness.

Sponsorship subsidises the Academy, from White Horse Capital, NatWest and haysmacintyre. The programme costs £695 (£55 per week), plus a commitment to offer to sell the Academy between 3-5% of your shares, at the next investment round.

Included within the course fee is attendance at Fresh Business Thinking LIVE!, usually costing £299.

The Accelerator Academy is working with the support of Start Up Britain, TechCity’s Entrepreneur Week, City Hall, various London universities and business schools and investment partners.

To apply for the course visit www.AcceleratorAcademy.com, or to learn more please email: info@acceleratoracademy.com to receive an application form or check our downloads page


Permanent link to this article: http://www.concap.cc/2011/10/the-accelerator-academy/

Dilution – to be avoided?

Why is it that the earliest investors are penalised the most?

After all, they are the ones that enable a business to get off the ground, the ones prepared to take the risk and often to provide support to the management. Later investors are happy to pick up the opportunity yet would not have invested in the first place. They are generally also quite happy to invest in a manner which is detrimental to the earliest, riskiest investors. They don’t have the capital to do the ‘A’ round, but it wouldn’t be there without them.

I ask this because I’m involved with three companies right now raising new money, all of them are pre-profit but revenue generating (so at least “interesting” to our risk avoiding professional investment community). None of these companies want to accept money that is detrimental to their early investors – and in one case have simply said “no thanks”. I understand what is happening but I don’t understand why early stage investors don’t get more credit and frankly deference by so-called professional investors – many of whom have never started a business in their lives yet feel able to criticise others that do.

So if you have an interest in the effect of dilution on your equity, take a look at this post on TechCrunch:



Permanent link to this article: http://www.concap.cc/2011/10/dilution-to-be-avoided/

Underground Poems

If you travel on London Underground, you have probably noticed Poems on the Underground. On several occassions I have taken note of a poem and looked it up later online.

Today it was Futility by Wilfred Owen (see here).

Apart from being a sad & poignant elegy for a fallen soldier in World War 1 it is also a memento mori for Owen himself, with just 5 published poems and killed one week before the Armistice. I guess this is what the Poems on the Underground is intended to do – to educate, expand horizons, encourage discovery. It certainly worked for me – I found all his poems and read his biography.

Permanent link to this article: http://www.concap.cc/2011/10/underground-poems/

Vince Cable

I had the dubious pleasure of seeing Rt Hon Vince Cable present at Innovate11 today, here are my top tips for him:

  1. Being late is not fashionable, it’s disrespectful and you should apologise for it. With over a 1,000 people waiting for 30 minutes to hear you that’s over 500 man hours wasted.
  2. Get your facts straight – d3o developed the patented system used by Tech21 – a British company which deserved the credit you gave elsewhere.
  3. I know innovation and business is such a bore, but a bit of enthusiasm and passion would make a real difference.

An utterly indifferent presentation.

Permanent link to this article: http://www.concap.cc/2011/10/vince-cable/