The art of company valuation

The art of company valuation

One of the most common question we get is “How do we valuate our idea or business” or “How can I know if this company is correctly evaluated”.

How to correctly assess the value of a company is virtually impossible. A good valuation to one person might be seen as hideous by another. FundedByMe will never judge the valuation of any of the companies seeking capital through its system, however, we can try and educate our visitors, enabling them to make smarter decisions.

Rule No 1.

The correct market price is what the market is willing to pay. This does not mean that the market is correct in its assumption regarding future returns or growth in asset values. The well-known US investor Warren Buffett put it correctly when he stated: “Price is what you pay. Value is what you get.”

So, it is hard to judge at the time of investment whether or not you will see your fortune melt away or grow at a tremendous rate.

Rule No 2.

Remember that the offerings on FundedByMe has been priced by the seller, not through a market-driven process. Even though the so-called pre-round exists for the reason to let prospective raisers of funds get feedback from potential investors, there is no guarantee that insights gained through the pre-round results in a correctly priced offering.

Rule No 3.

Always remember why you invest. At FundedByMe we like to talk about Value From Investment (VFI), which is all those things you get out of your investment. Financial returns can be one, but it might also be the joy of supporting an individual you like, a context to exist in, a good story to tell your friends, products you like, possible discounts, etc.

Rule No 4.

You are solely responsible for any investment decisions. It is risky to invest in unlisted stock. You might never see your money again and it can be hard – not to say impossible – to sell stock in such companies. But then again, some will make it big and pay back handsomely.

Rule No 5.

Be prepared to loose everything.

That being said, the question remains how to correctly assess the value the entrepreneur says his or her company has. Rest assured that the entrepreneurs are optimistic – that is why they became entrepreneurs in the first place – but sometimes their expectations seem sky-high.

Please bear in mind that many of the companies on FundedByMe seek funds in order to grow, sometimes very aggressively. High growth affects the future value of a company very positively.

Other factors, besides growth, you should look for are:

–       Cash flow

–       Margins

–       Strategic position and potential in their sector

–       The existence of patents or trademarks (can be very important)

–       The team (most early stage investors would say that this the only thing they are looking for)

–       Realistic expansion plans

–       Competition

–       Risks they are facing

–       Traction (high growth in user base, increasing sales, press reports, etc.)

Please also think over what you, as an individual, can bring to the table. After all, crowdfunding is only partly about the funds a company can raise. It is also about the networks the companies can amass and as an investor you are part of that network.

Your own individual experience from a sector or a specific type of investment might guide you well but please also be an active information seeker, for instance through the Internet, but also by asking other FundedByMe investors. Crowdfunding is, after all, all about the crowd.

If you want to drill down into specific valuation models, there is a vast territory to cover and we at FundedByMe will not recommend a specific one. Rather, read books, blogs and news reports. One good book to start with is “The Financial Times Guide to Valuation”:

http://www.amazon.co.uk/Financial-Times-Corporate-Valuation-Guides/dp/0273729101/ref=sr_1_3?s=books&ie=UTF8&qid=1367232773&sr=1-3&keywords=The+Financial+Times+Guide+to+Valuation

It has been written by David Frykman and Jakob Tolleryd, who themselves are Internet entrepreneurs and investors.

Please also note that valuations differ enormously from sector to sector and from time to time. To get a hunch of what the situation is like right now you can always try and compare key numbers with those of listed companies in the same sector.

Daniel Daboczy – FundedByMe