There is a lot involved when thinking about pitching to investors. There are elements like having a successful pitch, which are pretty obvious; however, sometimes, the actual process of obtaining some of that common-sense 'stuff' may not be so easy, like developing your company story, or providing an accurate business valuation.
While it may seem simple, it's by no means easy...
The Value of a Good Business Valuation
Surprisingly these are often overlooked components of a winning pitch. Investors don't want to know your current revenue or how scalable your business is - they need to know. Most Startups and young companies have spent some time, and have some business valuation information, but likely not enough.
At CapitalPitch, for every in-depth meeting we have with a startup, we ask them for their business valuation and how they managed to calculate it. Almost none can give us a satisfactory answer.
Business Valuation Provides Opportunity
In addition to providing the necessary information that angel and VC investors require to make thorough assessments, a business valuation also opens the door for other opportunities. This can be used to exhibit your research and forecasting ability. Not only will this impress potential investors, but this can be an opportunity to showcase your business savvy and your intimate understanding of your industry. That opportunity will only be availed, however, with a business valuation that works.
Major Components of a Successful Business Valuation
There is more to this simple but not easy process than many companies realize and there are opportunities that are too often missed. These are some key components to creating a structured, effective and accurate business valuation that will impress and win investors:
This one is obvious, at least at first glance. Of course, there isn't an investor in the world who would place a stake in a company that didn't have any basic revenue information. Historic income, projected income, net and gross revenues are amongst some of the most essential aspects of your valuation, but more can always be done.
This component of your business valuation is an opportunity to show investors your diligence and attention to detail that's guaranteed to impress. Here, you have the ability to present this information clearly and explain yourself eloquently. At CapitalPitch, we work alongside startups as the lead investor, and help you rebuild every aspect of your financials to produce a financial pack that investors will love, and help you stand out from the crowd.
Click here to learn more!
An often overlooked, but vitally important part of your business valuation is the information regarding the founder or co-founders of your company. An investor is no more likely to invest with people they don't know, than they are a company without transparent and accurate financials.
In amongst the 101 questions an investor will ask a founder, elements to consider include:
- How much experience is behind that company?
- What type of education or work history does the founder(s) of the company possess
- Why should an investor be confident in trusting you with their money?
Often, highlighting a wealth of education or decades of industry experience can be exactly what an investor needs to finalise a decision.
Startups don't bring a 1,000 employees and billions of dollars in sales to the table. Startups are young, aspiring and hungry - they want to grow and become industry leaders and earn revenues associated with such status. Investors are seeking precisely the same thing and have the same desire for your company. That equates to ROI for investors, and success for Startups.
That is exactly why the capacity for a business to be scalable is so vital. Can your concept, product or service be expanded? If so, how easy is that process, how much would it cost and just how large can your company become? This can be the make or break point for an investor, and drives your business valuation.
Developed Intellectual Property or Proprietary Technology
One of those valuations that fall under the "not easy" to obtain category is the value and fair estimation of intellectual property and proprietary technology. We adjust our discount rates based on the perceived risks associated with a startups' future and that is impacted by the uniqueness and ability to protect its IP.
It is incredibly difficult to really ascertain how unique a business' IP or technology really is, and whether any real success can be derived from that IP versus just having exceptional management. Obviously, having both is ideal!
We score our businesses on USP and IP and based off this scoring we adjust our discount rates, which affect some valuation models we use such as DCF, forward P/E and forward Price/Sales (both discounted back to today).
Putting the Picture Together
Does this seem like a lot of information and a lot of moving parts? That's because it is, and compiling and organising it in a way that paints a cohesive and viable picture of opportunity is the goal of a great business valuation.
But don't put this into the 'too hard' basket, because it'll only hurt your chances at securing investors. If investors know a business has not valued itself thoroughly or accurately, they know they can immediately negotiate on valuation and exploit startups and founders.
Luckily for startups we work with, CapitalPitch shows them how we produce their valuation so we can both negotiate from a position of knowledge and respect. It also means we arm the startups with the tools to answer their valuation question properly with investors.
A Conversation Without Words
What your business valuation states about your business, and how well it communicates to investors matters enormously. There is a conversation that occurs between your company and those potential investors before you even know who they are. Investors will ask your business valuation to tell them who you are, how much product you are moving and much more.
How your company answers those questions may very well determine if you are given the chance to introduce yourself to the right investor. A good business valuation can also help you to see your company from the perspective of investors and offer insights to improving your pitch.
Know Your Worth
Every business, from the major conglomerates to those fledgling companies ripe with opportunity, need to know what they are worth. Much of that value will fall outside of the red and black numbers on a spreadsheet. Knowing who you are, what you are worth and effectively using that information will enable you to present your company, ideas and goals in the most attractive fashion.
You need to really know what your company is worth - then you can prove this to your investors.
They should know, too.