Determining
Value
by
Wendy Hall
Larta Staff Writer
Rohit Shukla
Larta CEO
During the tech boom of the late 90s, valuation figures
reached dizzying heights proportionate to the interest in
emerging companies. Now tangible assets, realistic market
plans, and strong balance sheets have replaced hype and
expectations as the method to determine value for tech startups.
Generally
speaking, of course, the general economic and investment
climate of industries has determined the valuation of companies.
The valuation of companies has always been reflective of
the general economic and investment climate of those industries.
The tech bubble represented a departure, and one that has
repeated itself a few times in the history of capitalism,
and of this economy. After the bubble popped, tech sectors
that had previously been riding on valuation levels of unprecedented
highs, began to endure 50, 70, and even 90 percent dips.
As the pendulum has swayed in the other direction more and
more, wary and singed investors are now seeing company value
being gauged under the strictest guidelines of tangible
assets--executable products, strong IP portfolios, customer
base, market entry (and/or market plan), identifiable revenue
streams, as well as management track record.
"In today's environment, one of the most important
things in valuation is management or rather, quality of
management," says Adam Roseman, who heads Barrington
Associates' technology practice. Roseman is a speaker at
the upcoming Larta University workshop, Finance
and Valuation. "If they look at a management
team, and even have the slightest bit of hesitation, not
only is the valuation going down, but they're just not even
going to consider doing the deal at all."
For startup companies that have viable products or plans
but a slim track record, the valuation game has slanted
to the point that many VCs can now lay claim to almost the
entire company in order to fund the first round. "Without
revenue, without a clear path to profitability, you're going
to get absolutely slammed in this environment," says
Roseman. VC's are also investing in later stage deals that
are at attractively lower valuations (so-called "down
rounds")that have also shaken much of the market risk
out. These looming disadvantages for startups have forced
many to reconsider other financing options, or to reassess
their capital needs, and their structure e.g. by replacing
the focus on raising capital with more focus on building
financials, or creating stronger revenue streams and customer
base.
"Rethinking the financial statement, or basically the
company's relationship with the financial statement is all
tied into having a better understanding of valuation,"
says Alice Galstain of Bridge Business Group, who is also
speaking at this week's Larta U workshop.
During the course of the workshop, Galstain plans to discuss
how startups can use financial statements as a tool not
only to arrive at realistic valuations, but for business
planning. "When we walk into companies, a lot of times
what we see … the CEO's or the management team…
not really following closed sales--as well as sales in the
queue. And you need to be able to find the red flags, and
identify the warning signals as to what's going on in your
company, to give you an idea of where you are."
Oct
16 & 17: Larta University, Finance and Valuation
It is not crucial for everyone to know the nitty gritty
of accounting principles, but it is crucial to track the
company’s cash flow and burn rate. This workshop will
discuss the financial tools that allow entrepreneurs to
run their businesses responsibly and raise the right amount
of funding at the right time. Some of the topics include:
developing realistic financial assessments, budgeting and
forecasting, how to be fiscally prepared for foreseeable
budget cycles, valuation, reporting to financial stakeholders,
and more.
more
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