A brief comment on the valuation of early start-up companies

First of all, thanks to Karl, he let me know, in the Marxist theory, one of the three important components of the British political economy. He also introduced me to visit the great Adam Smith. Here, I would like to share with all entrepreneurs, without reservation, the most profound leap in the way I learned to do business: the invisible Hand of Adam Smith. All transactions in the world, be they cheap, expensive, cost-effective, profitable, even fooled. All are made by Adam Smith, an "invisible hand": some people are willing to sell at this price, some people are willing to buy at this price, is the buyer of the seller is willing to, there is no "valuation" of the truth and method to say so.

It is often asked how early startups should be valued. You can call the price ah, someone voted you, the final deal, VC out how much money you received how much money, this is "valuation." If you call the price of the sky, the result is no one to vote for you, then your company can be said that there is no market price, worthless.

Early start-up companies do not have any accurate "valuation" method, you and VC go to bargain to see do it.

Dizzy! What's the matter with me today, talking a little bit of nonsense ...

So, to put it another way, let's limit the logical assumptions of the discussion to the point where we're going again:

1. Everything has a starting point;

2. Money is added in the process of time (the financial turmoil is neglected)

3. We eat a mouthful of food, climbing stairs is a section of the climb up;

4. The size of the company is equal to the company's ability to generate revenue (including profits);

5. The seller always wishes to sell at the highest price;

6. Buyer (theoretically) always wants to buy at the lowest price (excluding luxury brands)

7. In Beijing Silk Street or Shanghai Xiangyang Road market bargaining way too not gentleman;

8. Adam Smith's "Invisible hand" is the key trading determinant

Early startups are the starting point for a great cause, it can be an idea in white, or it could be a young team with a grinding fist, or a group of brothers who have amassed their savings to rent a hut to tighten their belts day and night ...

Entrepreneurs you fire eyebrows need to change, even if you are lucky to go out to hit a fat VC, he asked how much money you need, you eagerly begged: "Quick give me 200,000." No, right, wrong mouth, it's 2 million. No no no, wrong again, give me 20 million. "VC easy to smile and strange to turn around the eyes:" Money, of course, no problem drops ... But you have to tell me, how much does it cost to buy your company's shares? How much is your company worth? If this is the first time in your life to find VC money, I guess at this time you, it must be like the first time you heard a girl said to you, "I love You" that way, you will suddenly blush, overwhelmed.

Entrepreneurs, if at this moment you have nothing, only one idea, please forgive me, I really do not know how to help you find the answer, you may be too great, I if I put you to the sale, I can not afford the responsibility of historical sinners infamy. However, if I were to answer this question, I would not even be able to confuse 200,000 and 20 million. (to emphasize that what I am saying here does not mean that any VC represents myself)--I will accurately calculate my essential funds for the next 6-12 months, no more than a few points, and then said to him: "If you can give me 6-12 months of operating funds, I can give you 1/3 of the company shares, This is my bottom line, absolutely will not exceed; If you can keep my life for the rest of the day, then you and I must be the legal half. ”

Investment is not science but art. Entrepreneurship is not science, it is art.

It is hard to determine a formula for early startups, especially those that have not yet formed and have no cash flow. Whether the entrepreneur or VC, can be optimistic about the future development potential, mutual bargaining company's valuation and pricing, should be objective, rational, enough, do not heels, inch ... If not favoured, then simply let Adam Smith "invisible hand" to justly it.

Of course, if the start-up company is not a blank sheet, have a certain income or profit, or have a product and relatively accurate financial forecasts, so we have some more can be used as a basis for negotiations, such as whether we can consider the "annual profit" as a multiple of the base of valuation? Does the premium of a listed company not often come out in multiples of the company's profitability? The low 2, 3 times times all have, the high dozens of times times, can even on a hundredfold. Of course, the premium rate on the private-equity market is always much lower than in the stockmarket.

In any case, for the change in the founders should bear in mind that the final "valuation", that is, the price of the transaction must be confirmed by the buyer, rather than you insist on shouting, shouting again high, loud and useless. In the VC market, there are few opportunities for sellers, perhaps sellers will never come again. The most important task for an entrepreneur is to try to fix the "first Institutional Investor" (remember: Institutional investors, VC, not your uncle or former boss) to confirm your company's valuation. Because, institutional investors, that is, professional investors, usually do not inexplicably to bid the price of the bargain, they will be based on analysis and judgment to your company "valuation", based on including but not limited to: (A) your company's current and future profitability?

(B) See if there are any similar companies that have been invested by VC, and what are the estimated ranges of those companies?

(C) Calculate how long it will take for your company to make the next round of financing if the plan is developed, and at that time, how many times can I put my money into increments?

You see that? Valuation "is definitely not groundless, Pat head can be fixed." We might as well analyze, (A) your profitability is the absolute truth, a profitable company is Bruce Lee is the basis of your profit on the two sides bargaining a multiple is a very simple thing; (B) It is dangerous to compare valuations with similar companies, because once you find your competitor in the market, Most VC will put their own out of the head and shrink back, people do not say VC only vote boss, second? If you old, the chance is very small, even if there is VC willing to cast old, your valuation must not be higher than the eldest; (C) VC In fact the most calculated, not your "valuation", That's what you're most concerned about. VC Heart has their own account, that is the next round of investors come in, or in the investment exit, they are now put into the money is not likely to add value, if so, in the end can increase several times?