Why entrepreneurs need a market-integrated, data-driven approach to valuing startupsavril 11, 2022
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When you want to sell something, what’s the first thing you do? You find out what the market usually pays and then adjust up or down accordingly. Value is relative, and market prices help you establish a baseline that ensures you can sell quickly and at the highest price. Since this has worked for centuries for all kinds of goods, why is it so difficult when selling startups?
Entrepreneurship is in a golden age. Mergers and acquisitions (M&A) activity hit $3.6 trillion in 2021 across over 35,000 deals — and PE firms expect the renaissance to continue. If you own a profitable, growing startup, you won’t find a better time to sell or “get acquired.” But one thing stands in your way of a successful exit: your valuation (asking price) and how you derive it.
Face it: You’re emotionally attached to your startup and probably won’t give it an objective evaluation. Without data that support your asking price, buyers won’t engage with you, let alone make an offer. Buyers need your performance metrics to forecast their returns, and then they’ll apply an appropriate multiple to your revenue or profit to arrive at a realistic valuation.
Evaluating your startup’s historical performance is straightforward. You already have the data. Deciding the multiple, however, is much harder. Not only does the multiple reflect the relative quality of your startup, but it also reflects what the market has paid, or what a buyer is willing to pay, for startups like yours. Will you be privy to such insider knowledge? Unlikely.
A staggering 96% of 1,300 polled M&A executives either use or plan to use data analytics to help close deals. If you want to close an acquisition on terms that make you and the buyer happy, you’ll need to value your startup using performance and market data. But unlike the M&A executives, you’re not a party to other acquisition transactions. You don’t have the data.
Multibillion-dollar deals or industry averages published online won’t serve your needs either. M&A professionals who close deals for a living can derive a more accurate valuation (and help you get acquired). But their advice isn’t free, and if your startup is small, it might seem overkill. Besides, shouldn’t you be able to value your business without hiring outside help?
Data and startups: Why you need to understand your valuation
Overvalue your business and you won’t attract buyers. Undervalue and you risk leaving money on the table. Either outcome is disappointing, discouraging, and might spoil your dreams of acquisition or starting a new venture. In other words, your valuation can make or break your chances of acquisition, and potentially, your entrepreneurial career.
That might sound harsh, but imagine toiling for years only for a buyer or business broker to tell you your startup is worth half you thought it was. Over time, your valuation expectations can fossilize and nix negotiations before they start. Equally, if you can’t value your own business, you’re at the mercy of buyers or their representatives who want to push your price down.
In one sense, your valuation is whatever a buyer would pay to acquire your startup. You might not have any revenue, profits, or even customers and still sell for millions of dollars. Such strategic acquisitions are rare and shirk conventional valuation models. You’re better off focusing on the broader market – the financial buyers who want a return on their investment.
You’ve probably heard financial buyers refer to valuations as part art, part science. Metrics and your startup’s defining attributes build up the science. Art is where things get tricky. How do you value intangibles like reputation, dominance, or talent? Rather than plucking a multiple from the air, M&A professionals review past acquisitions to establish a baseline and work from there.
But this won’t work for you. Why? Only the biggest deals make the headlines and business brokers and investment bankers remain tightlipped over their deals (they’re usually under NDAs). A published M&A report might point you in the right direction, but if you want to value your startup with greater accuracy, you need to extract the most relevant data.
Who has the power to give you better valuations?
The solution to the data accessibility problem might lie with startup acquisition marketplaces. A rise in platforms like Flippa, MicroAcquire and FE International has helped to accelerate M&A activity by digitizing or automating processes and cutting out intermediaries. They list thousands of startups and should track closed acquisitions as a performance metric.
What’s the goal of these marketplaces? They want to help you sell your startup. That’s their core business model. However they monetize it, each marketplace requires a buyer and a founder to successfully do business. Otherwise, the marketplace doesn’t do any business. With that in mind, shouldn’t these marketplaces help you derive your valuation?
They already have your data, including performance metrics, startup industry, employee numbers, tech stack, and more. All they’d need to do is match your data to similar startups that got acquired on their marketplaces. If they anonymized the data, you probably wouldn’t mind them adding your details to a valuation tool that gave you a more accurate valuation.
If a marketplace can parse closed acquisition data in this way, it can help you derive a realistic valuation before you even list. You wouldn’t need a professional valuation, necessarily, and you’d attract better offers from seasoned buyers who know a fair deal when they see one. Just knowing you have a realistic asking price can give you the confidence to achieve it at exit.
How would market-integrated valuations work?
Imagine a startup acquisition marketplace. Let’s call it Startups4Sale, and assume it’s closed at least 1,000 acquisitions since its inception. Let’s also assume it asks founders for detailed information about their startups, including performance metrics. As each founder reports an acquisition, Startups4Sale records their details and asking price to monitor marketplace activity.
Currently, that acquisition data helps Startups4Sale’s founders know how well their marketplace is doing. It’s passive data. But if they matched the data points of closed startups to those still listed, they’d gain an instant indication of whether that listing’s asking price was realistic. Imagine what they could do with that insight. How might it benefit them and you?
First, they might warn you in the UX. They might say, “Hey, your asking price seems a bit high compared to similar startups sold on the marketplace,” and suggest you reduce it. They might give you a suggested alternative – not a precise figure, per se, but a range within which you can decide on a figure that also covers intangibles like reputation, brand, and talent.
Perhaps Startups4Sale sees a bigger opportunity in opening up the data to other founders, those not yet thinking of listing their startups. It might create a separate valuation tool that syncs to their marketplace but is open to everyone, capturing an even larger data set. Over time, such a market-integrated and data-driven valuation methodology would only get more accurate.
And the more accurate your valuation, the more conversations you start. Getting acquired is no longer a high-stakes game where buy-ins are high and players hold cards close to their chests. Instead, it’s a consolidated data network that rewards participation, resulting in fairer, more accurate pricing and faster, easier acquisitions. And isn’t that what every founder wants?
Andrew Gazdecki is a former CRO and founder of MicroAcquire.
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