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?
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/