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Financial/Marketing/Path to Market

What could one expect of placing a value of a company if the product had amazing potential, the product is IP protected and a working version of the prototype is built?

18 Replies

Dimitry Rotstein
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Dimitry Rotstein Entrepreneur
Head of R&D at SafeZone
Generally speaking, evaluating a private company with no revenues and no investors is a very tricky business. Such questions cannot be answered reliably on a forum such a s this. You should get experts with full access to all company asset information to evaluate the company, then you should probe potential investors to see what value they are prepared to assign, then check evaluations of the most similar companies at the same stage, and then you just close your eyes and pick any number you like - it's all but a guesswork anyway. Personally, I like the number 1,000,000 - it's nice, round, and not pretentious :-)
Mohammad Forouzani
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Mohammad Forouzani Entrepreneur
CEO at Forecast.net
If your team doesn't have a previous exit, you will need to show traction to raise money. So it's all about your growth curve.

Generally speaking, most people raise about $500K as their seed round from angels, and it is usually expected to last about 6 months (possibly 12), and you should expec to give away 15-30% equity for that.

So if you were to put your business into a box (no business fits into a box!), you would raise your first round at about $1m - 3m valuation.

Unless you have significant traction, it's actually hard to raise seed money outside of this valuation range - it's either too low a value (i.e. it's growing too slow, or has some other flaw in the business hence the low valuation), or too high (i.e. too big for an angel round; you have to go to VCs which want a much lower risk investment - i.e. you have to have a very proven/established business).


Anton Yakushin
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Anton Yakushin Entrepreneur
Entrepreneur and Software Engineer
I think it depends on whether you're looking to sell your business, get an investor or simply value your company's outstanding shares for your own purposes. For the first two, see my answers below. For valuing your own shares, don't forget that if you pick a high price you'll pay more in taxes so there's really no need to go crazy here before you're making money.

--- The "scholarly" answer: ---

1. Estimate future earnings: Most traditional approaches to company valuation require knowing earnings over some period of time (for example, the Net Present Value Method often used by VCs). If there are no earnings yet, you're left to use your assumptions to estimate future income. This is not very reliable, especially if you're projecting income and growth over a period such as 5 years. Any final price arrived at by this method will likely need to be reduced (a lot) to account for risk.

2. Value your assets: First, add up the values of all your tangible assets (anything physical, like equipment). Second, estimate the values of your intangible assets (any nonphysical, such as your IP--trademarks, copyrights, etc). Intangible assets valuation can be tricky because, again, you're making estimates.

3. Use a comparable valuation: Look at the valuations of companies doing something similar (with regard to market, product, etc). Estimate your earnings and size over time and choose some companies to compare to based on it. I'll say it once more, though: when estimating earnings and growth, especially with no baseline, this can be very inaccurate. As a ridiculous example, say I'm building a social network, I project obscene growth and use Facebook for my comparable valuation. You can bet investors wouldn't buy into it.

Note: don't forget that investors (especially VC's) need to see a large ROI to account for the fact that most of their investments won't work out, so convincing someone that they'll see something like a 25X return based entirely on assumptions can be an uphill battle.

--- The "practical" answer: ---

Based on my talks I had with colleagues who seek out companies to invest in, I think that valuation can be very subjective. Most investors aren't nearly as interested in your idea or product as they are in you and your team, and your ability to pivot your business if you run into trouble. Some investors get excited about a product's potential reach and don't stick to any typical valuation formula; they bet on the entrepreneurs to find an income source later. As an example, look at MOOCs (Massive Open Online Courses), there the major players have millions in funding and yet are barely making a profit. The less of a commodity your product or service is, the more these things may apply to you. When you say your product has "amazing" potential, that's naturally a very subjective opinion, so your goal is to get your investor to see it (and you) that way. It also helps if your prototype is far along: are customers already using it? How much has it been refined based on feedback from your market? If not at all, this will harm any valuation because you haven't proven that customers love your product.

I think that if you're really on the brink of developing a profitable and high-quality product, take it as far as you can without selling of finding investment because you'll get a higher valuation the farther you get. Plus, you might make a lot of money and change your mind about selling so early, too!
Mark Sendo
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Mark Sendo Entrepreneur • Advisor
Founder, CEO, Forbes Contributor, Conference Speaker, TechCrunch featured story twice
Thank you Anton, Mohammad and Dimitri for the feedback. I think i failed to explained properly what the project is and what i invented as your answers would i think be different.. My Invention is an illuminated, air pressurized, playing surface with banked corners. In other words, imagine anair-hockeytable the size of a professional basketball court, and the players whererollerblades. its like inventing a new standard, a new platform so its not necessary a typical tech project. Now having said that, woiuld your answers still be the same? It'sa better mouse trap than traditional hockey that can change the culture of sports.
Dimitry Rotstein
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Dimitry Rotstein Entrepreneur
Head of R&D at SafeZone
I cannot judge this idea at all because it is well outside of my field of competence, but I believe that everything said above holds true regardless of the idea. In the most general terms, a company is worth as much as someone else is prepared to pay for it (be it a buyer or an investor) - no more, no less. What you really need to tell us is why you need an evaluation in the first place.
Anton Yakushin
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Anton Yakushin Entrepreneur
Entrepreneur and Software Engineer
Mark, based on your update I still think that what you should focus on taking it as far as you can rather than trying to sell it immediately. You did the right thing securing IP (patent, I assume) but now think about piloting your prototype with actual "users". Perhaps you could work with a local sports institution or school (especially one that doesn't already have hockey facilities)? An untested prototype means you didn't yet demonstrate that building a business around your product is practical. Prove that it works beyond paper. I'd also think about how it fits into the business model of your target market. For example, is it a less expensive alternative to ice hockey? Is it safer? Is it a better training tool? If you have a prototype that demonstrates your product's desirability to both its users and the market that would potentially buy it (I assume institutional), you'll be able to commercialize it yourself and you'll have a much better chance of selling it, too.
Mark Sendo
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Mark Sendo Entrepreneur • Advisor
Founder, CEO, Forbes Contributor, Conference Speaker, TechCrunch featured story twice
@Dimitry, Im looking to bring in a few outsiders in return for "work for equity" and/or "buy % of founders stock" thus a valuation is needed.

@Anton, . I have built a prototype, and it works. Im building a second larger air blade passing lane and plan to video a 5 time NHL AllStar in motion for a slap shop. My path to market is to launch a Kickstarter campaign for about a million dollars and to create worldwide awareness.. The cost to build a portable illuminated, air pressurized rink with benches for players, penalty box, etc.. is about $2 million. Once finished the path is to launch a 10 city (east vs west) game to recruit xtreme athletes, hockey players, and inline players.. i suspect at each city, meeting with local investors to license the technology to build their own airblade rink and once we have say 10, create a schedule and thus a new sport.. In addition to a new sport, we see other applications for the IP protected surface, such as back yard hockey (no cold or snow required :)) teen theme parks, etc..

Have the rink be lit with LED lighting combined with the air, its going to be fast and exciting. Is it possible to bring in equity co-founders so i can take some money off the table then to bring on a real team now to execute the above plan?
Anton Yakushin
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Anton Yakushin Entrepreneur
Entrepreneur and Software Engineer
Mark, I think a successful business needs to assess three things before launching (terms coined by IDEO):

(1) Desirability: your product should be a solution to a pressing problem or need for your customers.
(2) Feasibility: your product must be feasible to build.
(3) Viability: your business model should be accessible, practical and profitable (aka viable).

So far, you've built a prototype and proven feasibility. It also sounds like you're thinking about how to build awareness and build a product. That's great, but my suggestion is to focus on desirability and viability. Who is the customer? Why are they going to buy your new surface? What problem are you solving for them? One thing that caught my attention is that you are able to create a rink without snow or cold: perhaps there are some benefits here that you could explore. Keep in mind that your users and customers are two different market segments: users will use your product (play on the surface) and customers will buy it so that users can play. You'll need your product to be desirable to both.

As far as creating a new category of sport, I think it's cool but I don't think that's enough. Game designers build prototypes and do "play testing" with users to figure out if they're having fun and more importantly, why and how. Have your prototype tested by as many people as possible. See what they like and don't like. Improve the prototype until you've proven desirability, and only then go for building the final product with your KickStarter campaign.

Viability is very important, too. A new sport category requires promotion, and a video of a 5-time NHL All-Star alone isn't going to build you a business, it's just one promotional tool. Plus, promotion is only one part of your business model. Talk to your potential buyers and find out who would be interested and why. Understand your value proposition and all parties involved. Think about key partners, channels, revenue sources and costs. A good framework is the Business Model Canvas.
Mark Sendo
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Mark Sendo Entrepreneur • Advisor
Founder, CEO, Forbes Contributor, Conference Speaker, TechCrunch featured story twice
wow, never thought of this approach. thanks Anton. So we would build a business plan to raise, say around $250k. the prototype of this size may costs $100k. If thats the case, how much would you give up to RAISE that money? And do we contact potential buyers now? like hockey owners or any owner of a professional team?

Is this the stage of proof of concept?

Once achieved, we then launch a kick-starter and raise a series A?

do we contact like Hockey owners as potential buyers?

Would it be harmful if we ask these same potential buyers to be investors now?

And do we contact potential verticals and ask them that if we build this, would you be interested to buy?

mark



Anton Yakushin
1
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Anton Yakushin Entrepreneur
Entrepreneur and Software Engineer
Mark, I'm glad to hear you find my advice helpful.

You can certainly raise money to build a bigger prototype but I think you should first understand who your customer is and their needs. To answer your question, yes, you are doing a "proof of concept", but to do that you actually need to proveyour business concept. For a moment, forget about raising money and forget about building any more prototypes. You need to assess the desirability of your product and the viability of your business model (doing this will prove the concept).

Think about two things: your value proposition and your business model.


Your value proposition: figure out who is going to be using your product and figure out who is going to be buying it. For each, figure out whythey would do so, what problems you are solving and/or what benefits you are offering. Once you do that, however, you're not finished. At this point you have made some assumptions. Figure out what they are and test them by actually engaging with the customers.

For example, suppose that you expect adult athletes to use your new surface to play hockey because it is a safer playing surface than ice/roller hockey and can be used year-round. Also suppose that you expect local municipal arenas to be interested in buying your new surface because it costs a lot less money to operate than a cooled rink. You would get in touch with as many adult hockey players as you can and ask them: "would you want to train on a safer surface?", "would you use my surface?", "why or why not?", and also ask them to try your prototype and get feedback: "how does it feel?", "what do you like/dislike?", etc. Don't stop there, find out their actual needs, what they are concerned with, what problems they currently need a solution to and see if your invention can help. Do the same for the arenas. Imagine that you did this and found out that adult hockey players have no interest in the safety offered by your new surface, and in fact don't want any of the benefits you thought your surface offers, but you also found out that children enjoy playing on it and concerned parents really like the fact that it's safer. Also imagine that municipal arenas liked the idea, not because it saves money but because it would attract a lot of young athletes and bring them more revenues. In this example, you have made assumptions about your customers and tested those assumptions to find out they were false. You then updated your understanding and learned about your customers to arrive at a new value proposition for a new set of customers.

Your business model: beyond thinking about who will buy/use the product you also have to think about how you will reach them, where, what they will pay for, what it will cost you, etc. Test your assumptions here just like you do with your value proposition. I strongly suggest reading out the Business Model Canvas as a tool for tracking this.


Don't think of this process as linear. Creating a startup is not a series of steps that you take. It's more of a cycle, where you (a) test your assumptions about your business and your product by engaging with your actual customer and then you (b) change/update your plan or product to reflect what you've learned, and start testing your next assumption. Do this until you've proven your key assumptions.

Furthermore, what's the point of writing a business plan if you haven't tested any of the assumptions you're making in it? Your investors will ask how you know that all your assumptions are true. Experienced investors always ask about your customers and what you know about them, so don't skip this phase.


My advice is to start with customer desirability and business model viability. Write down assumptions and test them with real customers. Then and only then, feel free to raise money and do all the other things you have planned.
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