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Is company valuation a good scorecard?

We live in a world where - like it or not - companies and entrepreneurs are talked about in terms of valuation. As Fred Wilson said in this recent article"Valuation is an entrepreneur's scorecard. It has always been this way in startup land, but it is even more so these days when financings and the valuations are reported every day as the most important news items in the tech blogs." But he goes on "This obsession with valuation as the thing that tells you and the world how you are doing has a dark side. And that is because valuation is just a number.Unless you sell your business for cash at that price, valuation is just a theoretical value on your company. And it can change.And the markets can move on you and one day you are worth $2bn and the next day your are worth $500mm. Did you just mess up by 75%? No. The market moved on you."
All makes sense and in theory I agree, but what is the right way then to measure yourself and your company that everyone can understand and agree on? Feels like this is great in theory but nearly impossible in practice given the pressure from investors. Interested to hear others thoughts and what you hold up as the one metric you care about?

7 Replies

Tim Scott
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Tim Scott Entrepreneur • Advisor
President, Lunaverse Software
I just read a though provoking article about exactly this question:

http://heidiroizen.tumblr.com/post/118473647305/how-to-build-a-unicorn-from-scratch-and-walk

The author cautions very strongly against viewing valuation as "the grade at the top of the paper." She paints a hypothetical (perhaps not uncommon) case of how bad terms, in particular liquidation preferences, can leave you flat you despite lofty valuations.
Brent Wittke
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Brent Wittke Entrepreneur
CEO, Co-founder at Resale Therapy
Two words: Customer Traction.


Max Lamb
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Max Lamb Entrepreneur • Advisor
Operations - BD at Qualia Labs, Inc.
While gaining users and increasing engagement is obviously an important goal that many companies are focused on, the most significant numbers to me still involve revenue, and even more so, recurring revenue. That's what it all comes down to, what your valuation is ultimately going to be based on. Are you building something that people want enough that they'll pay for it? You can have a whole crowd of dedicated users, but if you can't monetize them somehow, then you don't really have a business on your hands. I think engagement over time is another useful metric. How often are your users interacting with your product, and does this stay high as time goes on?
Leo Lam, PhD
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Leo Lam, PhD Advisor
Product development executive, serial entrepreneur and Angel Investor
"...what is the right way then to measure yourself and your company that everyone can understand and agree on?"

Valuation only matters when investments are involved. Also, valuation can be inflated, and that could also bee harmful to a company. So, unless your company fits into a specific type that requires investment, it may not matter so much.

What Max Lamb said was great. A company/business can be judged by its revenue, profitability and sustainability of these two things. In pure capitalistic terms, those are the only things that matter. In fact, valuation of a company, in most circumstances, is calculated ("guesstimated" is more accurate) from the revenue (using a multiplier/NPV etc.) and/or EBITA. Except for a liquidation event where the valuation becomes set in stone at least for a brief moment, the valuation is a guesstimate number that can even be negotiated on. Given that, how valuable, really, is the valuation?

There is one more thing to consider: Impact. Is your company changing how people do things (creating innovation that may bring future values?)? Is your company helping a lot of people? Are you changing how people used to do certain things en masse? If so, that's another way that any one with any business sense would understand.

Besides that, I brought that up because this is a measure that also makes a lot of sense for non-profit that I have been honored to be involved in. These organizations do not have profit motive, but they do make impact on lives, while being financially sustainable. Showing how many lives they have touched, and what kind of impact they have had on those lives is absolutely understandable. In fact, it may even movethe audience more than big numbers on a balance sheet, depending on your audience.
Shreyas Slater Chityala
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Venture Capital, Entrepreneur, Strategic Advisor
It depends on which perspective you are coming from because objectives are not always aligned. As an investor, you want to get in at a low valuation with a high prospect company. As an entrepreneur you want a high valuation since that is one way to validate the company and also reduces the equity you give up - but it leads to higher and higher expectations. There are some companies i've seen that are focused on scaling to become attractive as an acuqisiiton candidate, and others that have no desire to be acquired. Both engender different management behaviour.

I would say that the most important thing is to define success on your own terms for the company. Traction, usefulness of product, customer/employee satisfaction etc. And track against these metrics
Peter Jones [LION: li.blueoyster~@~gmail.com]
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Peter Jones creates solutions for product USP, market messaging, team building, venture and other commercial capital
Some good comments already, but customer traction and satisfaction is an important indicator too.

Providing your business is sustainable, then providing a great or needed service to your customers can be a very satisfying feeling.

You've mentioned scorecard, and there is much talk about balanced scorecard business, where you set and measure the parameters you feel are important.

Customer service is often under rated, since it is often seen as expensive, but these days can often be trusted with the customers themselves, adding a little light overseeing to make sure the noisy mavericks don't get too feisty. App development may well play a part here over time.

Many corporates put customer service on their balanced scorecard, and are then surprised that their repeat business goes up. Customers do respond when they see more effort from their suppliers.

Innovation and speed of response also matter in markets subject to disruption. Although it's really hard to respond to a major market movement, IBM for one have proved that even super large corporates can re-invent themselves. Interesting to see how Microsoft will do this in response to Google.

HTH.
Lonnie Sciambi
2
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Lonnie Sciambi Advisor
"The Entrepreneur's Yoda"- inspiring, guiding entrepreneurs to achieve their dreams - CEO Mentor/Advisor, Author/Speaker
In a word, no. Valuation is like beauty - in the eye of the beholder. No slight to Fred Wilson, one of the most knowledgeable folks in the venture community, but that community makes up less than 5% of all small businesses. So for the rest of the entrepreneurs out there, who may never even sniff at an outside investor, valuation is irrelevant, unless as Dr. Lam pointed out, there is an exit event.

Traction and customer service are critical, but often subjective. The scoreboard has no room for judgments. It is what it is, and as Coach Parcells (who stole it from Coach Lombardi) often said - "you are what the scoreboard, says you are." Critical scoreboard numbers ought to be revenue and cash flow . Can't have a business without revenue; can't sustain that business without cash flow. Both should be monitored and managed daily, weekly monthly - as often as necessary, depending on your business. Following closely should be number of customers, revenue per customer and recurring revenue (thank you, Max Lamb). There's your scoreboard.
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