What is Value?
Monday, July 13, 2009 at 09:50PM 
Most entrepreneurs place a very high value on their idea or invention and it is with good reason. They may have invested their personal fortune and several years bringing their prototype to fruition. They may have applied for and won thousands of dollars in grants, taken on debt and convinced their friends and family to give them money. Understandably, there is a very strong emotional connection to the dream which translates directly to the perceived value of the company.
Sooner or later, an entrepreneur will need to partner with someone to to help grow the business, whether it is an angel investor, sales distributor, manufacturer or key employee. When that time comes, the question of company value will inevitably come up and the entrepreneur will face the brutal fact that the value of his or her company is no longer completely under their control. We have seen a few cases recently where this scenario played out to the detriment of an otherwise good deal, simply because the value of the company in the eyes of the potential partner was determined by different means than what the owner of the technology had in mind. Once feelings get hurt, the course is often irreversible and the partnership is lost or the investment opportunity goes away.
The value of an entrepreneurial startup is determined by a number of things. Three at the top of the list include; a) customers willing to pay for a solution to their pain, b) a large and growing market, and c) the ability of the management team to execute. Having a working prototype is a ticket to the dance but most investors expect the entrepreneur to get there on their own nickel. That is not to belittle the investment of time and personal fortune. It just means that value is determined by the customer and the market. Until you have steady growth in sales, the value of your company is open to negotiation and each side will make their justifications for a good deal.
In a recent example, a company developed a scientific monitoring technology that sells for $250,000 but the total market worldwide for this instrument was a total of 25 customers or so. The entrepreneur needed a couple million dollars to launch manufacturing and was frustrated because he could not arrange financing for the venture. In another example, an inventor developed a promising product for a well defined market but he possessed neither the skills nor the desire to build the marketing and sales infrastructure to take the product to the market. When an entrepreneur proposed a license arrangement based on a reasonable royalty for the product sales, the inventor was offended because he was not going to be the president of the newly formed company, believing the entrepreneur and her team were trying to steal his invention. He misunderstood that without an infrastructure to manufacture the product in large quantities and the ability to build a large sales organization, his invention is worth very little to anyone but him.
In the early stages of building a company, it is best to remain flexible and open minded about the value of the company because usually, there is very little that can be used to determine value. The best way to get through it is to remain focused on the end game. Everyone's interest should be aligned in building value over time. That should be the goal of any key employee, investor or potential partner. Often, it is said, that the best deal is the one on the table. Don't get emotionally hung up on value. Rather negotiate with a clear head and focus on what the partnership brings to the end game.
Reader Comments (1)
To me, this is where a mentor or Board of Advisors would come in handy. They are probably more objective and could help the inventor see the big picture. They may be in a position to give a qualitative value of a company if it is too early to generate a quanitative value.