The Zen of Startup valuation…

Just reached an exquisitely Zen-flavoured moment in my startup’s development, which I thought I’d try to share as best I can.

On the one hand, I can see that the value of my business pitch right now is precisely nothing, zero, nada. Though I’ve climbed a ~£1.5m mountain to get Nanodome to pole position on its industry grid, this has increased its time to market – unsurprisingly, I’ve had to use ingenuity and persistence rather than money to solve problems. This delay has dissipated some of the key advantages I started off: to survive the last two difficult years, my competitors have had to raise their game. Hence the rationale fossilized at the heart of my pitch has become outdated: and so right now I have to be ruthless and ditch that pitch, arguably leaving me with nothing but footprints in the sand.

On the other hand, the value of the business machine I have built is immensely greater in so many other ways. The difficulty in business lies not in having money, but in having effective ways to spend it: I’m not talking less about ‘product vision’ or ‘market vision’ here than about the business machinery that needs to be in place to take such visions and give them both wings and a jet engine. If understanding a market and conceptualizing products or services for that market are a business’s left leg and right leg, then arguably the most important part is having the scope, experience and drive to get them to walk together in the same direction. If your company can do that, then I’d say it has real value.

What is so delightfully (yet frustratingly) paradoxical about this is that it is probably the incessant focusing on details that makes the pitch worthless: the leaves (the numbers) serve only to hide the trees (the business vision). So, your first moment of startup Zen for today is to see how the value of a pitch (which almost always include historical baggage such as persuasive arguments to overcome irrelevant objections) is quite different from the value of a company (which arises neither from market vision nor product vision alone, but rather from the future-directed business vision infrastructure to capitalize from them both).

But how can we ever quantify the value of a pre-revenue startup? I suspect we can come remarkably close, though probably not in the way people (particularly angels) would have you believe.

For a pre-revenue startup, its value lies not in the set of particular tactics that it has already devised (because these were in the very different business context of an underfunded startup), but in its core abilities to devise, manage, and execute new and appropriate tactics whatever its context going forward: really, its value lies in the depth of its ability to constantly generate pragmatic tactics to get itself to its next milestone or end line as fast as sensibly possible within its immediate constraints.

The temptation is always to try to value the work that has gone into a startup as a progressive accumulation of layers of good stuff, as though the greater weight of the resulting IP thus accreted has a value that necessarily flows upwards on a graph. But in fact, the value of the enterprise lies more in its ability to perform as a coherent business engine.

Thus, today’s second Zen moment of startup valuation is that a business at the point of investment has effectively no history and no future: rather, what you have worked so hard to construct is more like a tactics-generating engine living purely in the present. From an investor’s point of view, then, the company’s value is its ability to continuously generate a series of short-term tactics to parlay the money I put into it into more money, and its ability a little later on to get me my stake back again (but multiplied up by a large number) at some kind of exit.

(Arguably, the main exception to this is patents – but that’s a topic for another day).