It’s time to end ‘finger in the air’ valuations

Thierry Clarke, CEO and co-founder of InvestorConnected, explores why it is time to stop the 'finger-in-the-air' valuations.

Last week, Apple edged towards becoming the first company to reach a trillion-dollar valuation. Clearly, this is no mean feat for a company that was started in a garage by two blokes and a circuit board. This mammoth valuation is just reward for Apple’s stunning innovation over the years.

As a publicly-listed company, Apple’s valuation is dictated by a simple metric; how much are you prepared to pay for a share in that company. At the other end of the spectrum, we are seeing start-ups settling on valuations based on no particular metric whatsoever.

Investors I speak to are often exasperated by entrepreneurs who wildly over-value their companies, a practice which seriously hinders opportunities for securing funding. We’ve all seen an episode of Dragon’s Den where a silly valuation sees the majority of dragons declare they are ‘out’. The same thing is happening in VC boardrooms up and down the country.

So what options do start-ups have when it comes to delivering an accurate valuation? Firstly, it’s important to remember that a valuation is ‘whatever the other side is prepared to pay’. This means there will always be some flexibility or wriggle room when it comes to negotiating a valuation. But that doesn’t mean there can’t be any science behind finding a fair valuation.

It’s always worth investing in resources to get your start-up financials sharpened. Whether that’s a good old fashioned accountant or online resources that help you do it yourself. The platform I founded, InvestorConnected, allows start-ups to input all available financial data into a platform that then crunches the numbers on your behalf and delivers an accurate valuation based on the data you provide.

There can be no doubt that investors up and down the country are looking for a uniformed set of guidelines that provide consistent and comparable valuations. Not only does it make the process of managing a portfolio much easier, it also allows investors to create like-for-like comparisons. In today’s environment with hundreds of proposals landing in an investor’s inbox each week, this particular capability could change the way investors evaluate their options.

Ultimately, business is a numbers game. Whilst valuations are often overlooked or tainted by founders’ over-ambition, getting the right valuation on your start-up is a vital step in communicating business acumen that will convince an investor to take a punt on your business.

Thierry Clarke is CEO and co-founder of InvestorConnected

Owen Gough

Owen Gough

Owen Gough is a reporter for SmallBusiness.co.uk. He has a background in small business marketing strategies and is responsible for writing content on subjects ranging from small business finance to technology...

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