RSS at Feed BurnerValuation Breakdown of a Start-up
Entrepreneurs looking to get funding for their start-up company often value their company much differently than investors. Entrepreneurs use the concept for the business (the product or service) as the driving factor behind the valuation they seek and feel they deserve. In fact, they usually think the idea is so brilliant, that they attempt to keep it top-secret and prefer not to disclose many ideas. They even like to require that investors sign an NDA (see my previous post related to investors and NDA’s).
Unlike Entrepreneurs, investors tend to place much more value on the management team. Bill Payne’s book, The Definitive Guide to Raising Money from Angels, shows the general breakdown for what he considers when valuing a start-up:
Management Team - 30%
Size of Opportunity - 25%
Product or Service - 10%
Sales Channel - 10%
Stage of Business - 10%
Other Factors - 15%
Even though this breakdown makes the percent of the valuation attributed to the product or service appear to be very minimal (10%), Bill mentions that there are other factors that are directly attributed to the product or service, such as size of the opportunity. But it is obvious that the management team of the start-up is very important. Some of the most successful companies are not a result of the initial product idea. For example, you probably know that Flickr started as an online multiplayer game. The team behind the company adapted and made it into something huge.
So just because a company has a brilliant idea or a fantastic technology, it does not support a huge valuation.
By the way, if you have not checked out Bill’s book, I would highly recommend investing the money to purchase it.