In the universe of young, emerging technology, product, or service companies, in most cases, those companies will either be pre revenue or at best have small revenues.

These same companies will require capital to fund their growth and their future, as nothing of consequence occurs without sufficient capital. This is always a painful exercise as capital in this sector of the market is predictably expensive. Having said that, the first responsibility is to build the business and you pay the necessary price for the money.

Which brings up the next question, how do you establish a valuation for these young companies which is fair to them and attractive to potential sources of capital. This is a very difficult line to define and even when having reached a conclusion, in the final analysis, the funding source will have their own thoughts and demands.

Nevertheless, this question of valuation must be answered, realizing that It is an imperfect science and in many ways, an educated guess.

FIRST THE SUBJECTIVE FACTORS.

1. The size of the market. Big markets give birth to big companies.
2. The maturity of that market. Is it yet to be developed and maximized?
3. The capability of management to exploit and maximize the potential value of the market
4. Does the company have an innovative operating model uniquely superior to the norm for the industry?
5. Does that operating model create substantial profit margins?
6. Does the company have resources to draw upon, such as capital, to ensure its survival?

These are all subjective questions, but the answers must necessarily be factored into valuations, as they are an important part of the equation.

MORE OBJECTIVE DETERMINANTS OF VALUE

This becomes more difficult as many of the traditional standards are either non existent or inconsistent with young companies. Standards for consideration include:

1. A multiple of future revenues or present ones if they exist.
2. A multiple of present and future EBITDA. Here you are relying on questionable pro formas that are themselves an educated guess.
3. Prevalent industry valuations, if they exist.
4. Rate of growth plays a factor in determining multiples.
5. Do they have a one of a kind technology or one that is vastly superior to the prevailing competitive technologies

THE CONCLUSION

Valuation is stymied by the absence of history and also the fact that you are depending on future pro formas.

Taking all of these factors, both subjective and objective, it then remains To pick that number upon which Founders and Investors can both agree,

Malcolm McGuire