Singapore Entrepreneurs

Everything in this world has a price. Yet, pricing is not only a science but also an art. It requires precise estimate of figures and values while also able to extract the best value out of qualitative factors. Here we will discuss pricing from a venture capital point of view.

It is often said that valuation is an important skill required by an investor (venture capitalist, bankers and business angels). Similarly, the entrepreneur needs to develop some form of intuition to how to value your company, no matter at which stage it is in.

To value a company is not just a science but also an art, because there is no clear and straight rule to get it right. The successful venture capitalists pride on good due diligence and smart financial calculations to hedge their bets. The value of the company depends on several factors: for example, the company’s stage of development (seed stage, series A, B, C or D, mezzanine), the surrounding environment (economic outlook of the industry and public stock market), the company’s position in the market, the prospects for the market which the company is moving towards and the likelihood of how much cash required to achieve its objectives. Of course, most venture capitalists and investment bankers will have their own set of tools and intuition on how to value a company.

Which stage is your company anyway

The stage at which your company is at will determine how much factual information is available to provide a basis for analysis. Obviously a startup will no financial record, and relies on projections based on what the company’s founding management team believes it can achieve. Depending on whether it is a new technology or new service, they may exist no comparable companies against which to measure such projections. Here is where the art really comes in to value such a company. Early stage companies will definitely start with loss making because initial resources are required by the founders to create the concept, product or service. The company’s historic records provide no basis for valuation. Whether it is a startup or early stage companies, the entry valuation is dependent on qualitative factors such as the investor’s return expectations, the proportion of the company that the management is willing to give up in order to attract investment and the investor’s view of the new idea. Furthermore, the investor will have to analyze the product and market opportunity in order to establish whether the company is scalable. If the market opportunity is small, even the largest company in the same market will be small.

As the company grows bigger and becomes more developed, more financial information are available. These companies seek funding to expand their businesses either by (i) opening new branches, (ii) increase the number of sales and production staff or (iii) broaden the portfolio of existing products with new ones. At this stage, the company can be analyzed with a comparative analysis to existing competitors and perform the product and market analysis to establish its maximum potential. The investor will consider his or her risk expectations and management will need to consider the proportion of the company it will be willing to sell to an investor.

Next: What are the factors that an investor need to consider?

No related posts.