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What’s Your Start-up Worth?

These three steps will help you determine what your new business is worth.

Asheesh Advani

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It’s commonly said that business valuation is more art than science. If this is true, then the practice of valuing a start-up business is squarely in the domain of the artist. Nevertheless, entrepreneurs need to put a value on their start-ups in order to raise money, and investors need to put a value on their investments to generate liquidity. Since neither entrepreneurs nor investors are known for right-brain artistic thinking, this article aims to provide some tips for left-brain thinkers to make sense of start-up valuation.

1. You are what the market says you are

If investors are telling you that your start-up is worth R4 million, then that’s what it’s worth. You might think it’s worth more. You might even know it’s worth more because your company may have more than R4 million in liquid assets, receivables, or sweat equity. But if you’re unable to raise money for your start-up with a valuation above R4 million, then you’ll have to accept the market valuation.

However, this isn’t always true. If you raise money from relatives and friends rather than professional investors, it’s possible that your company has been overvalued or undervalued (more likely, overvalued). For example, if you persuade your father and your rich aunt to purchase shares in your business at R80 per share, it doesn’t mean that future investors will pay more than R80 per share — even if your business grows and prospers.

2. But you can also tell the market what you’re worth

Although this might seem to contradict the point made above, it’s possible to tell the market how to value your company. After all, if investors think your start-up is worth R4 million, it’s usually because of something you’ve told them. By definition, start-ups don’t have a history of financial performance on which to base a valuation. Therefore, it’s up to the entrepreneur to develop a process for valuing the company based on comparables and financial projections.

  • Comparables: Find out how much similar companies in your industry and geography are worth. If you have a high-tech or high-growth start-up, accountants and lawyers are among the best advisors to help you determine the market rate for comparable companies at your stage. In my experience, attorneys tend to overvalue start-ups, and accountants tend to undervalue start-ups, so you may want to talk to both before making a decision.
  • Financial forecasts: Although it’s notoriously difficult to forecast revenue at a start-up, you’ll need to do this to determine value and to eventually defend your valuation. For example, if you’re starting a pet food store, your valuation and financial projections are likely to be lower than if you’re starting a speculative biotechnology firm.

3. You’re not really worth anything until you’re profitable

If you’re not profitable, your business probably isn’t worth much. It doesn’t have as much liquidity as it would if it were profitable. Many businesses cannot be sold, since there aren’t enough business buyers for every seller. Almost all unprofitable businesses cannot be sold for the same reason.

This makes valuation particularly challenging for a start-up. Since young businesses take time to become profitable, the trick of valuing start-ups is to focus on the future. First, determine how many years it will take to be profitable. A business with a long road to profitability will usually be worth less than one with a quick path to profitability. Next, determine how much comparable companies have been valued at when they reached profitability.

A company that could be worth R20 million at profitability will be worth a fraction of that number at the start-up stage, based on the likelihood of success, the timeframe to exit and the quality of the management team.

It’s easy to get caught up in the excitement of valuing your company at the highest amount possible and forget that you’ll have to deliver on the expectations of investors. It’s also tempting to adapt your business model to maximise start-up valuation. Be careful about overvaluing your start-up with faulty assumptions; it will make your life difficult — particularly if your investors have governance rights, such as positions on the company’s board.

Entrepreneurs need to use creativity in valuing their start-up businesses. Traditional approaches to valuation based on book values and P/E ratios are akin to painting by numbers. If you want your start-up to be a masterpiece, you’ll need to use the right side of your brain as much as your left to determine value.

Asheesh has over 15 years of experience as an entrepreneur, investor, and social innovator.

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Launch

Selling The Dream

When you’re starting a business, the secret to success is getting everyone — from customers to suppliers — buying into your vision.

Alan Knott-Craig

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I started a company in 2016 offering road building in residential areas for local municipalities. I realised that there is too much risk involved and I do not have the capital to purchase machinery. The overheads are also too high. I feel more comfortable supplying municipalities with commodities. I have been in sales and have good people skills and sales experience. However, I’m struggling to get a foot in the door. Manufacturers are reluctant to give me a credit advance. As a result, I had to let go of many opportunities. How do I overcome this obstacle? — Martin

I can only speak from my own experience selling to municipalities. I did it once, successfully. This is how I did it:

  1. I convinced the municipality to roll out public WiFi in low-income communities.
  2. The municipality awarded me a contract.
  3. With that contract in hand I shopped around to find a company that I could sub-contract. That company had to take a risk that the municipality would pay me, and I would in turn pay him. I had to take the risk that the sub-contractor wouldn’t deliver the goods.
  4. I found a sub-contractor.
  5. We deployed the WiFi.
  6. The municipality paid its bills.
  7. There was never a hint of corruption.

In retrospect I realise I was the beneficiary of a succession of benevolent miracles.

Miracle No. 1: Meeting a political leader that shared my vision and was competent.

Miracle No. 2: Getting a legitimate contract out of a municipality.

Miracle No. 3: Finding a sub-contractor I could trust, and that trusted me.

Miracle No. 4: Successfully working with the municipality to fulfil the contract.

Miracle No. 5: Getting paid by the municipality.

Miracle No. 6: Avoiding corruption.

If you believe in miracles, keep going. If you’re slightly more risk-averse (or less desperate) than I was, then rather don’t target municipalities to build your business.

You’ll note that I solved the supplier credit problem by finding a sub-contractor that trusted me. That’s the only way to do it. Not only do you have to sell the dream to the customer, you must sell the dream to the supplier. I recommend reading Shoe Dog, the story of Phil Knight and Nike.

Related: Alan Knott-Craig Answers You Questions From Business Idea To Start-up

I want to start a business, but I don’t know how to approach my local bank or investors, probably because I don’t have any experience in the business field. I am currently in a full-time job and holding on to the security of the monthly salary (which I know is wrong) but I have responsibilities. How do I break out? — Lorenzo

First, the security of a monthly salary is under-rated. Don’t be so quick to wish it away! Of course, a salary is a long-term dead-end. When you’re forced to retire at 65, you’re likely to be staring at 35 years of supporting yourself and your family relying on pension and savings alone. Assuming they don’t retrench you before age 65.

Be grateful for a salary, but be on the look-out for a way to make a living on your own terms.

That way you will learn skills that can be used after forced-retirement age, and even more important, you will be able to keep yourself busy rather than spending your old age pottering around the house in boredom and driving your significant other mad.

Forget about banks and investors. If you want to start a business, you must do it without ‘other people’s money’. Find a problem in your industry, solve that problem, get paid for solving the problem. Repeat.

Ideally find a like-minded colleague that you trust, pool your efforts and partner to find a way to make a living in your own business. Partnership massively de-risks entrepreneurship.

Related: Pay Your Dues Before Raising Capital


3-rules-for-being-an-entrepreneurAlan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.

What it’s about

It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur. For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy. This book is a collection of tips and wisdom that will help you make money without forgoing happiness.

Get it now

To download the free eBook or purchase a hard copy, go to www.13rules.co.za.  To browse Alan’s other books, visit bigalmanack.com/books/

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5 Lessons To Follow As You Take Your Product To Market

Don’t overly complicate things when launching your business. Instead, follow this advice from a successful entrepreneur so you’ll do things right.

Scott Duffy

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When launching a new business, product, or service, the most common mistake entrepreneurs make is trying to do too many things at once in the belief that going to market with “more” is better.

It isn’t. During your initial launch period, or when relaunching new products or services, “more” means additional risk. More also means unnecessary complexity, as well as additional time to market, so more capital will be required.

Below are some important things to remember as you prepare to take your product to market:

1. Don’t try to build Rome in a day

I have a good friend who raised $2 million in a very tough market to start a consumer internet business. Finding that much money to start a new business was amazing, and I congratulated him on a big win. He was ecstatic and told me he couldn’t wait to get to work on the site.

One year later, I ran into him again and asked how it was going. He sang the blues. He said he was doing terribly. In fact, he was on his way to his attorney’s office to shut the company down. They had launched a few months before but had already run out of money. I asked how that was possible, and he talked about his big vision, how his company aimed to provide everything their target customer could possibly want to buy in the category. Their goal was to be a one-stop shop. He and his team invested all their time and money building something big and comprehensive, confident their target customer wouldn’t want to go anywhere else once their website was up and running.

When the company got started, they were solving one problem for one target customer. It was a simple concept. But when the money came in, everyone started working on other “great ideas” and “shiny objects.” They kept building and building and building. They went from solving one problem for one very specific target customer to building a one-stop shop that did a lot of things for a lot of different people. Then they started running low on cash, so they decided to push the product out.

After the launch, they learned, much to their surprise, that about 95 percent of their users used just 5 percent of the site! And that 5 percent was the original product to solve the original problem.

So that means 95 percent of the time and money invested was essentially wasted. What can you learn from this?

Related: Hello Group’s Initial Product Failed The Night Before Launch. Today They Are An Industry Disruptor

2. Focus on one thing, the simplest thing

When kicking off a new product or service, put all your energy and focus into that product or service. Focus on one thing at a time. It shouldn’t be the hardest thing; it should be the simplest, what we’ll call the minimum viable product (MVP). The MVP provides the opportunity to learn the most about your customers, with the least amount of time, money and effort.

The MVP puts you in a position to go to market quickly, collect valuable feedback and not waste time building things customers don’t want. This strategy significantly mitigates your risk and helps avoid the trap my friend fell into. Remember, Amazon started just as an online bookseller.

3. Follow the 85-percent rule: Good is good enough

good-is-good-enough

Striving for perfection is the enemy of any product launch. As a rule of thumb, when the new business or product is 85 percent of the way there, you’re ready to go. In my experience, the level of effort required to reach 100 percent isn’t worth the additional time and expense at this stage. You’d be much better off getting something into the market and beginning to test.

4. Be great at collecting, and learning from, feedback

Once you’ve launched, listen to and learn from your users. Develop feedback loops to learn everything you possibly can.

  • What do users like and dislike about the product or service?
  • What features would they like to see added to enhance their experience?
  • Which features don’t work or generate little interest?

Do whatever you have to do to engage with your users. That may include offering incentives to get feedback on surveys or in focus groups, reaching out on social media, or generating outbound calls to learn more.

The hardest part of this process for many entrepreneurs is to be completely receptive to what customers tell you. Given your passion and all the time you’ve spent on the project, you may not want to hear negative feedback. You may be inclined to think the customer just doesn’t get it. But feedback is the most valuable tool you have as an entrepreneur. So listen, consider, and use what you learn to iterate, improve, or even throw out some of what you have built or planned.

Related: 3 Start-up Funding Tips To Help Launch Your Company

5. Avoid the shiny ball syndrome

As you start developing your MVP, you must fight “feature creep” at every step. You, your team, partners, and everyone else you share your vision with will have ideas about what should be added. While many of them will sound good at the time, they are instead shiny objects that distract you.

Your job is to stay focused on one thing, get it to market and then deliver the next thing. By focusing on one thing at a time, you can get to market quickly, learn a great deal about your product or service from actual customers and make changes based on their feedback And if your launch doesn’t fly, you have significantly mitigated your risk.

This article was originally posted here on Entrepreneur.com.

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How To Launch An Online Coaching Business

Cut through the noise and create a viral product.

Bedros Keuilian

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Work from home? Control your own schedule? Impact people across the world with your product or service?

Internet marketing is on the rise for a reason. It gives you the ability to scale your business to a global level without forfeiting your personal freedom. Still, there’s one question that still prevents entrepreneurs from entering the online space: “Is it really possible to make a living off the internet?”

Not only is it possible, it’s lucrative when done correctly. We live in the Golden Age of internet marketing. Thanks to social media, everyone can get in front of a camera and pitch their idea to the masses. Good enough, right?

Not quite. These days a big idea will only get you started; it’s what you do to bundle and package that idea that matters. Here are the three steps you need to take to launch a profitable online business.

Flesh out your idea

Of course, before you create your product, you need an idea. Your idea must solve a specific problem that a specific group of people face. Make sure you establish that before you move forward.

Now, before you begin creating your product, you need to write your sales copy. Your sales copy (or sales video, if that’s what you prefer) should be enticing enough to take prospects from “I’m interested in this” to “I need to buy this now.”

Related: Paddy Upton: People Centred Coaching

But, why write your sales copy before creating your product? Too many entrepreneurs write copy that promises a lot but delivers next to nothing. When you write your copy before creating your product, you build the blueprint to create a product that satisfies your customers’ needs –without overpromising.

Your sales copy should address the prospect’s problem, explain how your product is the solution to that problem, and include a list of bullet points that summarise the benefits of your product. Make sure you nail the first 500 words – easily the most read section of your sales copy. Finally, always create a sense of urgency or people at home won’t be motivated to buy your product.

People always ask me, “Well, what if I’m not a good writer?” That’s OK. Just say your pitch out loud, record it and send it to an online transcribing service. For a relatively inexpensive price, you’ll get your sales copy written out for you. Just review it, copy it and paste it to your website and boom – there’s your sales copy!

Build the “know, love and trust” factor

Most people believe you need to sell prospects first, then deliver results. But, what if you flip it? It’s much easier to sell someone once they know, love and trust you as an authority in your space, rather than selling them on your product before they even know if you can deliver the results you’re promising.

That’s why the most successful internet marketers – including myself – give away boatloads of free content via blogs and videos. Granted, the stuff we give away for free could easily be packaged together into a high-priced course, but that would be short-sighted. You don’t want prospects to buy from you once and move on – you want them to become long-term paying clients.

See, you deliver free quality content to your prospects, then they take it and implement it into their businesses. They start to see results in advance, which leads them to trust you more and more. Soon, they begin to crave more knowledge from you, and their willingness to pay for your products and services increases.

Eventually those prospects become your most loyal clients. They buy your front-end products, your upsells and your flagship products – all of which I’ll get to in just a second. But, before you get that far, make sure your prospects know, love and trust you before you worry about selling them anything.

Create your front-end product and upsells

Once your copy is written and you’re building the know, love and trust factor, your next move is to create a front-end product – a product that’s easy to sell. This could be an ebook, a membership site or a course that comes with follow-along videos.

Now, you might be tempted to charge a high price for that product. Here’s the thing: Most of the money is made on the back end. I’ll talk more about this in a second, but for now just remember that the front-end product is not the final product you’re really trying to sell them. I – along with many of my fellow internet marketers – don’t mind breaking even or losing money on front-end products because I know I’ll more than make my money back with my flagship product.

Instead, your aim should be to use that front-end product to upsell them instead. So, after they purchase your front-end product, offer them three different upsells. An upsell is a higher-priced product or service you offer a customer after they’ve bought something from you. These upsells should be done-for-you, and they should enhance the front-end product by making it easier to understand or more efficient at getting results.

Why are upsells so important? Besides adding value to your front-end product, you’ll be able to recruit more affiliates to promote your business. An affiliate promotes your product to their own audience for a commission fee. If you make money through upsells, affiliates will choose to work with your business over your competitors because you can pay them higher commissions. The payoff? You get more traffic going to your webpage and ultimately more bottom line revenue.

Related: 6 Questions You Should Be Asking When Coaching

Move them to your flagship product

That’s how you set up the front end of your online business. But, what about the back end? Remember I said that most of your money will be made on the back end and not the front end?

That’s why you need a flagship product to pitch your clients once they’re done with your front-end product. But, what in the world does a flagship product look like?

It could be high-end coaching sessions. It could be a spot in your exclusive mastermind group. It could even be a suite of software that teaches them everything they need to know about their industry. The front-end product is a way to get your clients through the door; your back-end product is the money-maker product, the one they’re more likely to buy once they’ve already purchased something from you.

I’ll give you an example. People will often find my products online. Usually when they finish using those products, they’re still hungry for more knowledge and advice. At this point, they’re considered qualified leads for my mastermind program, so we make sure they know about that programme and how to become a member of it.

That leaves you with one problem: How do you send marketing emails to every single person that buys your front-end product/upsells? It’s basically impossible, unless you’re in front of your computer screen 24/7 (which I’m sure you’re not). Fear not, because it’s actually easy to do when you use an auto-responder system to send out all those emails on your behalf.

It’s simple: When your clients purchase your front-end product, the system automatically sends them emails from you. That way, you can build a sequence where you give away even more of your best free content before sending them an offer for your flagship product. By the time they get to your flagship product, they’ll be so confident in your expertise and results that they happily pay the higher price for your higher level of service.

That’s the simple science behind converting your prospects into clients, and your clients into fiercely loyal clients. It’s how you sell your highest-priced online programmes without running into any of the typical sales objections. Follow these three steps and start building your own online business empire today.

This article was originally posted here on Entrepreneur.com.

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