When Anthony decided to start his own software company, he knew he’d need an investor to bring his idea to life. So early on, he dedicated time and effort to position his company for equity financing. In doing so, he had to learn how investors would value his business that had yet to demonstrate meaningful revenue or profitability. At first, the path was unclear. But eventually, he realized three important business valuation drivers that all early stage companies should know. By being able to clearly communicate the value of his company around these value drivers, he was able to secure financing from an angel investor.
So, how exactly did Anthony create value within his business before the ask?
He crafted a value story that was realistic, coherent, and compelling. While Anthony spoke the “language of an entrepreneur” (one around opportunity, optimism, and vision), he knew he had to also speak the “language of an investor” (one around reducing risk and improving returns).
Here’s the secret sauce:
1. Assemble a Strong Management Team
The management team is one of the most important value drivers that a business can have. The key word here being “team.” Commonly, entrepreneurs tie their company’s value directly to their involvement in all operational aspects. Contrarily, investors want to see a group of people who possess complementary skillsets. Specifically, they want to view the team’s ability to work together in setting objectives, monitoring activities, and motivating employees. All of which are qualities that help funders determine the likelihood of future growth and success. Thus, strong teams can drive higher prices.
2. Develop an In-Demand Product or Service
Increased demand and opportunities for growth are the first two things investors look for in business. They want to see specific cash flow strategies and a diverse customer base. Companies with a single client accounting for more than 10 percent of overall sales is a red flag. Those who have plans for new products and product lines get viewed more favorably. Investors also like a marketing plan that tells a good story. They should be able to see upfront the problem solved and the unique business solution. Essentially, investors want assurance that the business has momentum. The best way to assure them is a written plan documenting a clear strategy for growth.
3. Define and Document a Clear Growth Strategy
A well-written business plan and brand strategy can increase the value of a company because it helps investors see the risks and rewards. Good plans document all systems including automated and manual procedures that generate revenue and control expenses. They also list the methods used to identify and track customers, as well as, deliver products and services. Standard business procedures and systems that are well-documented add value to the final asking price.
In conclusion, it’s the business owners job to tell the company’s story. Craft a tale that shows value using the three strategies listed above. A company that demonstrates limited risk and real returns can attract investors at a premium price even in the earliest stage of business.
To learn more about early stage valuation drivers, join Quist at Colorado’s Longmont Startup Week, July 24 through 28. Entrepreneurs, wanna-preneurs, intrapreneurs, creatives, techies, inventors, business owners, and investors are all invited to attend as our guests. Register for our presentation “The Art and Science of Valuing Your Startup” on July 25 at 9 AM here.