The Art and Science of Valuing Your Company

How would you value my company?

It’s a question I get asked frequently. Just the other day, I was at lunch with an old friend who asked me how would I value a company where he is on the board. He gave me some basic information and I came up with my methodology largely based on historical growth, projected growth, sector, stage, uniqueness of the technology, customer traction, management, etc… I ended up being in the range he had in mind.

Years ago, I was told by a very astute hedge fund manager that valuation is ultimately what someone is willing to pay for your company. And that, I think, is the right answer, which is why we frequently do not put a pin in valuation when going out to market. Our goal is to run a competitive process for clients and generate strong investor demand to help raise valuation. Yes, we can always do a comparable company, precedent acquisition and discounted cash flow analysis, but in the end what matters is who and how many parties want to invest.

Taking a closer look at select transactions I’ve worked on in the past, company valuation can at times be heavily influenced by perception. In one case, an investor was willing to pay a 4x step up (much more than the company expected) from the previous round, driven largely by his perception that there were many other suitors at the table. In another case, investors were attracted to the geography and sector of the company as well as the caliber of the existing investors. They perceived the company as being a very unique opportunity to invest alongside smart money in a hot area and made the investment within 30 business days.

And while perception can play a role, the best way to ensure a fair valuation on one’s next round of funding is to focus on business execution – it’s what can be controlled. Also, there is nothing more attractive to an investor than a management team that can really execute and has proven so in the recent past. Staying focused on accomplishing key milestones and hitting numbers will lead to good things. And perhaps, if timing is on one’s side, there may be the added benefit of favorable transaction comps or public comps trading at elevated levels.

Valuation, as they say, is part art and part science. The art pertaining to the perception created through a well-coordinated, well-marketed capital raising process, and the science relating to valuation methodologies. Companies should ensure they understand both sides well prior to initiating a capital raise process and particularly before engaging in serious dialogue with prospective investors.

RJ Lumba
GrowthCap CEO & Founder

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