I read an article in Inc about YouNoodle.com and their Startup Predictor app. It’s an app that basically Match.com’s you and your startup to spit out a value for your startup in three years and a FICO-like score ranging from 1 to 1000.
The Inc. magazine article had an example of a company that was pulling in around $75k in revenue that was valued at $11 million (remember, this is in 3 years, not today). Some VC’s chimed in with some paper napkin valuations in the $1-5 million range. Someone commented that it’s a publicity stunt.
Honestly, though, can a survey tell you the value of your company in three years? Sure it’s hard to value a company at times but then again, if you’ve done some research, can it be that hard? And why would you want to stick to a “standard” valuation. You think Google, Facebook, and even Twitter used some sliding scale to determine their valuations before they went public or were otherwise valued?
Supply and demand…as often as it’s quoted, it’s still very true in a general way. Twitter got $15 million earlier this year (nowhere near profitability) valuing it at $95 million. Sure it’s got a lot of people using it and it’s a part of the culture now but no one still knows how to make money off of it (except the shareholders).
Plus, there’s always the negotiation factor. The number you come up with is always going to be higher than what the investor’s going to want to pay (in terms of equity). But, you also don’t want to value it unrealistically and stick to that number.
So, what is the problem with the Startup Predictor? There are actually two: first, it doesn’t account for that random factor (9/11, the housing bubble, your main competition going out of business, whatever) and second, assuming the valuation is unrealistic it sets an unrealistic expectation.
The above example gives the startup’s founder an $11 million dollar figure that will affect him when he talks to a number of VCs who feel he’s work $1-3 million. How’s he going to feel? Could the numbers blind him to other factors that might improve the value of his company in the long run (like the resources the VCs might be able to bring, the advisors that might be more likely to join knowing that some well-known/respected VC funded them, etc.)? It’s like the problem of “beta” companies that toss out their product for free to get people hooked then discover the need for cash flow and slap a monthly/yearly fee onto those people and watch half of them leave.
If the valuations get fine tuned, it might be a good tool to help startups going into VC negotiations. At this point, I worry that some overeager–and less experienced–founders might let the valuation go to their heads and burn a few bridges before they learn how to get funding. I guess eventually evolution will kick in at some point but a solid valuation tool could go a long way in the end.