Friday, April 29, 2011

Common Pitfalls when Valuing a Startup – an Introduction

By Jeff Boardman, CEO and co-founder of, Inc.

My name is Jeff Boardman, and in this series of articles I want to describe some common pitfalls for entrepreneurs when valuing their company. During graduate school I interned for a year at a venture capital firm and have spent the last three years as the co-founder of, Inc. This article is meant as a starting point to tackle the following topics and create an interactive platform to discuss these issues that many entrepreneurs face. You can direct the next topic to be discussed in detail by commenting on this blog post, or tweeting @JeffreyBoardman.

First the topics:
1. Your financial projections matter, but not in the way you think.
2. Liquidity is required. Don't make the mistake of saying, "we'll pay back our investors through dividends over time as we don't intend to sell the company".
3. Valuing a pre-revenue business.
4. The importance of the right milestones.

Financial projections should reflect your business model.

There are a few key things that investors look at in your financial projections:
1. What are the assumptions?
2. Are the expenses comprehensive?
3. What milestones are they focusing on?
4. Is the revenue growth rate reasonable?
5. Are sales and distribution specific to this business accurately modeled?
6. What comparables lend validity to the projections?

Let's assume that an investor is completely convinced of the validity and potential accuracy of your financial projections. At that point, the investor needs to determine if your company is fundable. This means that the potential payoff is significant enough to justify the risk, such as a 10x cash on cash return for a Series A investment. An investor also needs to determine the valuation of your company.

The next questions:
1. How much capital is required now and until it is acquired or goes public?
2. When is the capital needed?
3. What is the range of potential exits (acquisition or IPO, again based on comparables)?
4. What is the most efficient path to achieve key milestones that increase the value of the business?

I've asked some questions and highlighted some potential topics. Now its your turn to weigh in and ask questions, or suggest the next topic to be delved into next. Please leave a comment on this blog or tweeting @JeffreyBoardman.

I've asked a lot of questions, highlighted a lot of topics, and overall not told you any specifics. Now it's your turn to weigh in and ask questions, or suggest which topic should be delved into in detail next. Please leave a comment/question and let's get the discussion started.

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