Why entrepreneurs need a market-integrated, data-driven approach to valuing startups

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When you want to sell something, what is the first thing you do? Find out what the market typically pays and then adjust up or down accordingly. Value is relative, and market prices help you establish a baseline that ensures you can sell quickly and at the highest price. Since this has worked for centuries for all kinds of assets, why is it so difficult to sell startups?

Entrepreneurship is in a golden age. Mergers and acquisitions (M&A) activity reached $3.6 trillion in 2021 across more than 35,000 deals, and PE firms expect the renaissance to continue. If you own a profitable and growing startup, there’s no better time to sell or “get acquired.” But one thing stands in the way of a successful exit: your valuation (sale price) and how you get it.

Face it: you’re emotionally attached to your startup and probably won’t give it an objective evaluation. Without data to back up your asking price, buyers won’t commit to you, let alone make you an offer. Buyers need your performance metrics to forecast your earnings and will then apply an appropriate multiple to your earnings or earnings to arrive at a realistic valuation.

Assessing your startup’s historical performance is easy. You already have the data. However, deciding on the multiple is much more difficult. The multiple not only reflects the relative quality of your startup, it also reflects what the market has paid, or what a buyer is willing to pay, for startups like yours. Will he be aware of such inside knowledge? Unlikely.

A staggering 96% of the 1,300 M&A executives surveyed use or plan to use data analytics to help close deals. If you want to close an acquisition on terms that make both you and the buyer happy, you’ll need to value your startup using performance. Y market data. But unlike M&A executives, you are not a party to other acquisition transactions. You don’t have the data.

Multi-million dollar deals or industry averages posted online will also not meet your needs. M&A professionals who close deals for a living can get a more accurate valuation (and help you get acquired). But his advice isn’t free, and if your startup is small, it might seem like overkill. Also, shouldn’t you be able to value your business without hiring outside help?

Data and startups: why you need to understand your valuation

Overprice your business and you won’t attract buyers. Undervalue and you risk leaving money on the table. Either outcome is disappointing, discouraging, and can put a damper on your dreams of acquisition or starting a new business. In other words, your valuation can make or break your chances of acquisition and, potentially, your business career.

That may sound harsh, but imagine working hard for years only to be told by a buyer or business broker that your startup is worth half what you thought. Over time, your valuation expectations can fossilize and nullify negotiations before they start. Likewise, if you can’t value your own business, you’re at the mercy of buyers or their representatives who want to lower your price.

In a sense, your valuation is what a buyer would pay to acquire your startup. You may not have any revenue, profits, or even customers and still be selling for millions of dollars. Such strategic acquisitions are rare and circumvent conventional valuation models. You’re better off targeting the broader market: financial buyers who want a return on their investment.

You’ve probably heard financial buyers refer to valuations as part art, part science. The metrics and defining attributes of your startup build the science. Art is where things get tricky. How do you value intangibles like reputation, domain or talent? Instead of pulling a multiple out of thin air, M&A professionals review past acquisitions to establish a baseline and work from there.

But this will not work for you. Why? Only the biggest deals make the headlines, and brokers and investment bankers keep quiet about their deals (usually under confidentiality agreements). A published M&A report can point you in the right direction, but if you want to value your startup more accurately, you need to extract the most relevant data.

Who has the power to give you better reviews?

The solution to the problem of data accessibility could lie in the start-up acquisition markets. The rise of platforms like Flippa, MicroAcquire and FE International have helped speed up M&A activity by digitizing or automating processes and cutting out middlemen. They list thousands of startups and must track closed acquisitions as a performance metric.

What is the purpose of these markets? They want to help you sell your startup. That is their core business model. Regardless of how they monetize it, every market requires a buyer and a founder to do business successfully. Otherwise, the market does not do any business. With that in mind, shouldn’t these markets help you get your valuation?

They already have your data, including performance metrics, startup industry, number of employees, tech stack, and more. All they would have to do is compare your data to similar startups that were acquired in their markets. If they anonymised the data, you probably wouldn’t mind having your details added to a rating tool that would give you a more accurate rating.

If a market can analyze closed acquisition data in this way, it can help you get a realistic valuation before you even list. You wouldn’t necessarily need a professional appraisal, and you’d attract better offers from experienced buyers who know a fair deal when they see it. Just knowing you have a realistic selling price can give you the confidence to pull it off at checkout.

How would market-embedded valuations work?

Imagine a market for the acquisition of emerging companies. Let’s call it Startups4Sale and assume it has closed at least 1,000 acquisitions since its inception. Let’s also say you ask founders for detailed information about their startups, including performance metrics. As each founder reports an acquisition, Startups4Sale records their details and asking price to monitor market activity.

Today, that acquisition data helps Startups4Sale founders know how well their marketplace is doing. They are passive data. But if they were to match the data points of closed startups to those still listed, they would get an instant indication of whether that listing’s selling price was realistic. Imagine what they could do with that idea. How could it benefit them and you?

First, they might warn you in the UX. They might say, “Hey, your asking price seems a bit high compared to similar startups selling on the market,” and suggest you lower it. They may suggest an alternative, not a precise figure per se, but a range within which you can decide on a figure that also covers intangibles like reputation, brand and talent.

Perhaps Startups4Sale sees a greater opportunity in opening up the data to other founders, those who are not yet thinking of listing their startups. You could create a separate valuation tool that syncs with your market but is open to all, capturing an even larger data set. Over time, such a data-driven, market-integrated valuation methodology would only become more accurate.

And the more accurate your assessment is, the more conversations you’ll start. Getting Acquired is no longer a high stakes game where buy-ins are high and players have the cards close to their chests. Instead, it is a consolidated data network that rewards participation, resulting in fairer, more accurate pricing and faster, easier purchases. And isn’t that what every founder wants?

Andrew Gazdecki is a former CRO and founder of microacquire.

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