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Nobody wants to hear that their baby is ugly and as the father of a three year old, you just might lose your front teeth. My little girl has the sweetest smile, the cutest nose, and quite frankly is a princess; she has the tiara to prove it. However, it is quite possible that no one has a vested interest in telling me any differently. You see, I am hoping, but not counting on, my daughter to graduate from the best ivy league school, marry an honest man, growing up to be the President, and what the heck, change the world. But that's what I am hoping for. It doesn't have to happen. In fact, all I really want is that she be happy. For right now though, no one needs to tell me that it ain't gonna happen.

A parallel occurs every day in the business world. Unfortunately, the truth sometimes has to be told. You see, as an independent, third party valuation firm, we often have to sit down with the management team, or founder of a company and say. "Sir, I am sorry, but your baby is ugly!" (Sometimes really ugly). Read another way, "your business model does not make any sense" or "you are three years behind the competition" or even "your projections don't account for required working capital to finance future growth". Unfortunately, as a third party, we have a vested interest (or even a requirement) in 'being straight' with the many companies we value. And sometimes, I fear I am going to lose my front teeth, no matter how hard I try to soften the message.

For many early stage companies, you can expect this straight talk from few third parties. It won't come from your attorney; it simply is not his or her role. Not your accountant, they tend to look backwards at what happened versus where you are headed. Your friends and family? They actually probably gave you money at some point and are hoping that it wasn't a gift. Consultants are actually in just the opposite position. Once hired, they have a vested interest in finding something or 'anything' to justify their fee. Probably the only third party that will give you the straight talk is 1) your investors and 2) your valuation firm. Your investors want you to get it right. If it already is right, there's little to say other than 'keep up the good work.' If you are an early stage company though, these hard conversations are likely to occur and it's best just to take it all in, but don't take it personal. Brad Feld of Mobius recently wrote in his blog that many times people get angry with him and after years of experience, he simply becomes amused. It isn't personal, it's business and quite frankly, without being frank, your business could continue down the wrong path and in the not too distant future you will be on to the next idea.

A third party valuation professional has to discern between realistic projections and someone's late night creativity with an Excel spreadsheet. They need to know that when you say you have an advantage over the competition, that they can see it, and possibly even measure it. I don't care what anybody tells me, if you have negative gross margins, you can't make money by selling more. Just close the doors! If your revenue has grown by 5% for the last three years, there better be a damn good reason it is going to grow by 20% next year. Or if your distribution model depends on "some guy" you're just not operating with a solid business model. And somebody needs to tell you that. If you are planning on an IPO in the next year, hit the refresh button. There are very few companies going public today. The IPO process used to take about 3 months, today, expect at least 6 months for the S-1 process and probably more if you have made considerable stock option grants in recent years. As a result, most VC groups (i.e. your board members) are targeting a strategic sale. So make nice with your current competition, they may be your business partners one day.

For those of you who do not yet have outside investors, consider this observation. I recently attended a conference and one of the keynote speakers pointed out, "if you are trying to raise money and you haven't been able to; in this cash rich environment, you may want to consider a new business idea." That is to say, if your idea works, investors will want in. There isn't much selling to do. But, if you can't raise the capital, well, I am sorry sir, but your baby is ugly. Now, please don't punch me in the mouth.

Category(s): Valuation Thoughts
Posted by Tom Miller at 06:30 AM | Permalink | Comments (0) | TrackBacks (0)