Prior to this section on valuing, I had very little knowledge about what computations were performed to determine the exact value of an organization. I mean, I know these figures weren’t merely pulled from the sky, but I genuinely had no idea regarding how these calculations were completed. In Winning Angels by Amis and Stevenson, there is a section devoted to explaining several methods utilized to capture the value of a business so that investors can better ascertain the investment that needs to be made initially as well as the returns that should be anticipated in the future.

     Amis and Stevenson note that there are several techniques that are employed to assess the value of a business. My particular favorite was the Berkus method, where Dave Berkus has created his own methodology for evaluating start-ups that he has applied since 1993. Having a consistent approach, I think is key, and will allow the investor a more complete overview of what to potentially expect from the venture financially. As Amis and Stevenson note, Berkus “identifies a clear relationship between price and tangible aspects of the opportunity” to provide a reasonable start-up valuation. For example, for a sound idea, prototype, quality management team, quality board and roll-out sales, each respective category would receive a dollar amount. These amounts would range from $0-2 million; and, when totaled together gives the entrepreneur and future investors a practical figure of what the deal/organization is worth. While there are certainly “cons” to this process such as the semantics behind “quality” as well as the definition of each element, Berkus as well as Amis and Stevenson note that it is a reliable appraisal technique that generally closely calculates value.

     One particular valuation technique that I also liked from this section was the idea of the Pre-VC method. Here, the entrepreneur and the investor avoid all value negotiations and strictly focuses on completing the deal at hand. While this did sound somewhat bizarre, it also reminded me that if these individuals are indeed in a professional relationship where trust and integrity are paramount, then the value of the business and any further negotiations about its worth can undoubtedly be held off until these calculations can be accomplished in a more accurate manner by a professional. As Amis and Stevenson pointed out, “many winning investors focus more on finding good people to work with, letting the more involved contracts and negotiations come later with additional rounds of capital. They believe that the first focus should be on their relationship with the entrepreneur, and not what they can get out of him.” Here, I think back to an example from the book about Jeff Bezos attempting to raise capital for his start-up Amazon. Though many believed that Amazon was not worth the initial investment and subsequently decided not to capitalize on the deal, Amazon has since gone on to be worth $160.47 billion and, “The e-commerce giant has come a long way from its inception as an online bookseller to a retail giant that is disrupting everything from the assumed supremacy of big-box stores like Walmart to grocery store and delivery service models.” Not to mention, Bezos is now the wealthiest man in the world with a net worth of 113 billion, even after a divorce where he transferred $36 billion worth of Amazon stock to his ex-wife. Yes, billion with a B!!!

     So, what are your thoughts? What methods would you use to “value” a deal/organization? Be careful…I mean, you wouldn’t want to pass up on the next Bezos, now would you?

 

References

     Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.

     Anderson, J. (2019, November 19). How Much Is Amazon Worth? Retrieved June 03, 2020, from https://www.gobankingrates.com/money/business/how-much-is-amazon-worth/

     Forbes The Richest in 2020. (2020, March 18). Retrieved June 03, 2020, from https://www.forbes.com/billionaires/

30 thoughts on “Valuing

  1. Great post! I also like the Berkus method and I think you have pinpointed why – consistency. Having an approach or method you believe in is critical to success. Without it, you are constantly chasing success and are prone to overreactions to anomalies. By following a prescribed way of doing things a person can ride out the inevitable failures or negative results that eventually lead to big payoffs. Your mention of Bezos and Amazon is a perfect example. Investors relying only on “gut” or with a less regimented process may have seen his numbers and passed. On the other hand, a method like “Berkus” may have led to seeing this opportunity for what it was.

    It reminds me of my days coaching basketball. A “bad shot” was a “bad shot” whether it went in or not. If you keep shooting that shot, you’ll eventually get yourself beat. Conversely, a “good shot” was always a “good shot”, regardless of the result. Shoot enough of those and your team will win more than they lose.

  2. An excellent summary of Valuing. I agree with the book on liking who you are working with. It is so important to enjoy working with someone for an endeavor to be successful. I have not made any million-dollar deals and can not even fathom it. I do know that it is miserable trying to do business with someone that drives you insane. Many times you can’t put a dollar amount on an aggravation fee. I love your writing skills. I can’t wait until your next blog.

  3. Tiffany,
    Great post! It is important to focus on building business relationships. An investor needs to learn more about the business when considering investing in that particular business. While learning more about the business and building relationships along the way will provide a better option for investment based on how successful the business proves to be.

  4. Great Post! My venture will be an e-commerce retail store and Amazon is one of the businesses I study and glean from. I am sure the investor that passed on him regrets it now! As you mentioned in your last post, this is why it is helpful to try to from relationships with investors earlier if possible. Even if the pre-establishment of a relationship isn’t formed, there should still be trust present. This leads to better decision making and an overall better partnership .
    Best,
    Shay

  5. I also found the “valuing” section of the book to be an eye-opener. I have had very little exposure to the financial calculations and I fully appreciated all of the insight the authors and the contributing angel investors provided on the subject. The information has gone a long way towards enlightening my way of thinking about the matter.I look forward to learning more about these processes and expanding my skill-sets in this area.

  6. I like the Pre_VC method a lot. You aren’t just buying into an idea you are buying into the person who will execute the idea. While I do understand using the method of valuing a company based on different categories, I think this helps both parties ascertain whether or not the partnership is going to work, and it also helps the investors figure out if the idea itself can make them money AND if the entrepreneur is capable of staying the course and playing the long game to insure success.

    • This was certainly one of those topics that I had no “real” prior knowledge about. I would definitely have to get with a financial advisor so that they could assist me with the valuation. Afterwards, I would want to talk with the entrepreneur/investor to make sure that the valuation is agreeable. The Pre-VC method seemed that it would allow us to focus on the business at hand instead of being anxious about the profits from the start. In my opinion, if the idea is good and the subsequent analysis deems that it is viable, the valuation can be held off until the company is actually established and profitable.

  7. Hello Tiffany,

    I like the Berkus Method as well and it seems to be pretty popular among other classmates of ours as I read their post. What I ultimately gathered from this section is that Valuing a company is not an exact science. What ever method that an angel may choose should go along and support their overall investment strategy. I was pretty amazed by the quick growth of Amazon and I am curious of Jeff Bezos previous experience. It seems he had good background in driving the growth.

    Great post!

    • Yes, Bezos is a beast! He has done a tremendous job with Amazon and it only looks like he’ll continue escalating his stature as an outstanding businessman! No, valuing does not seem like an exact science, but the entrepreneur and the investor should certainly speak with someone about these figures and identify to the best technique for the both of them going forward.

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