How Much is Your Company Worth - Why You Shouldn't Care
Entrepreneur's New Year’s Guide
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I was recently speaking to a few entrepreneurs after a panel discussion and the topic of valuations came up. One prospective founder asked me what the valuation of my company will be in 18 months. I gave the honest answer- I don’t care.
Startups these days are bantered about as if they were in a fantasy football bracket or IPL league. The current chatter about Flipkart’s multi Billion exit only adds to the euphoria. Did you hear Lyft raised another $150 million at a $2.5 billion valuation? Then there are the companies that are barely off the ground getting VC backing with 20x valuations, despite having no product or business model.
The four things a Founder should care about:
1. Do Customers Want my Product And Will They Pay for it. Founders should especially in the early stages of their company, spend less time meeting prospective investors and going for yet another conference. Focus on meeting the people that matter – your customers. Skip the fire side chat/panel discussion and other trappings of founder fandom. The only chats you should be having, should be with customers who are using your product or the investors who have already bet on you. When you feel you have some consistent revenue, happy customers then put on your Sunday best and think about venturing out to hold forth on panels i.e. after achieving the basics of your business.
2.Venture capital is not free money: For many startups, funding has worked to their detriment — unnecessarily raised stakes, a path to unnaturally rapid growth. Build a product that your customers want not what the Board wants. Spend the time to explain why you are building it and get customers to talk to the Board to endorse your vision.
3.The Valuation Bubble is Not Reality- Prick the bubble, before others pop it for you. When you stop caring about valuation you focus on the metrics that really affect you. You should know your revenue, your margins, Unit sales, HR costs, how fast you respond to customer service inquiries, how many people signed up for your product and what are the daily sales numbers. Those are the real numbers that matter.
4.Have a North Star A north star is to have a relentless vision as to where you want to be and motivates you every day and you in turn reiterate it to your employees. For many current entrepreneurs sadly the vision they pursue is only a unicorn valuation. That quest then becomes the end game, and the vocabulary of liquidation preferences, ratchets and redemption becomes the vocabulary of choice rather than the metrics of your business. Finally you end up succumbing to the old adage: “you set the price, I set the terms”.
Instead have a north star for the business and why you started the company. Amazon North Star has remained unchanged over the years: "Our vision is to be earth's most customer-centric company; to build a place where people can come to, find and discover anything they might want to buy online." The products have expanded from books to virtually everything possible, but they still pursue and try to deliver that North Star.
A valuation is an invented number that ebbs and flows on the basis of how much someone else thinks you’re worth. It’s nothing more than a distraction. Valuation and giving interviews to the press about your valuation is not the end game. Never forget the real endgame is putting in place the nuts and bolts of building a sustainable business.