Is start-up valuation artistic?
Enterprise Valuation: is it a kind of art?
Every person in charge of finance at a start-up is now struggling to raise funds for the company. Especially currently, investors like Venture Capitals are now shrinking their capacity to invest in new opportunities while the global economy is under a slump. As one of them, I have been working for five years to raise funds and have experienced various situations in fund-raising scenes.
Through the process of fund-raising, one of the principal elements is enterprise valuation or company valuation. I often argued with my colleagues and other entrepreneurs on the company valuation. I consider that most people who read this article know how to estimate company valuation using well-known traditional methodologies.
However, the above is not a trigger for me to write about whether the start-up valuation is artistic or not. It all started with the following episode a month ago.
I met a manager at a restaurant in charge of finance at a start-up company on the series D fund-raising. He is a co-founder of the start-up, which operates a business on e-commercial selling clothes and other accessories online. At that time, I was very anxious about the valuation of my workplace as a person in charge of finance and thought I should recalculate the valuation. Our company has the plan to expand the business to overseas, and fortunately, just achieved the first sales last month. Nevertheless, the global economy and the environment of start-up investment have been worse since the beginning of this year, so I thought it was necessary to review the previous estimation method. Of course, I did not tell him the details of the estimation.
But he opposed my way of thinking about the need to review because he insisted that the company valuation is artistic. What? Artistic of what? He continued his opinion that when he worked at a securities company, his boss advised him that company valuation comprises 80% of the artistic matter and 20% of the quantitate issue. At first, I could not understand what he said, but I started to be in his shoes while discussing with him. Sure enough, his company had been estimated more than I expected when I searched after meeting him.
From my point of view, the artistic matter is equivalent to the business plan of a company with an optimism of its business in the future. On the other hand, I think it must not be gone too far with the valuation at times like now, although the optimistic view of the future is crucial for an entrepreneur to propel his business and improve performance (or sales revenue). Did you check the trend of the stock price (or the market cap) of companies listed on NASDAQ this year? Most of the stocks have been downtrend since the end of last year. The stock price of some platform companies has gone south for over several months, and there is no sign of recovery from their historical highest price soon.
These days, commodities such as energy, materials, and consumer stables such as foods are considered worthwhile in the stock market instead of cryptocurrencies, derived IT services. In a crisis, the latter is not critical for humans, and it is valued as the thing necessary for life-sustaining activities. Then, what are valuable things in your company to make money by operating a business with a well-structured operation? You and I must find out and estimate them precisely with the well logically structured method.
In other words, in the new era, I want to insist that the acrobatic point of the company valuation becomes less critical. The business should be managed artistically and succeed while being supported by invested funds. However, the company valuation must be estimated logically and accurately, subject to its fair value and business potential to make money. Money is not infinite, and the invested capital is only a kind of debt with no repayment obligation.
