One of the most valuable lessons I have learned in the last eight years is that the valuation of a company is based on the story that is being told about its future.
Our sense of reality – our idea of what has actually taken place – is filtered through our experiences. Most of you will agree that two people can observe the same event and come out with different accounts of what happened based on a personal bias. The same holds true for an investor or partner in a business; their experience informs their decision making. Their experience with a company in the same industry, or with the same management structure, or with a similar channel strategy, or “what happened” 10 years ago, convinces them that their past experience will transfer to the new project or business.
On one hand, it’s humanity’s way of coping with new things. We look to the past in order to inform future decisions. When performing a valuation of a company, most investors take a number of factors into consideration in order to balance bias and risk. Nevertheless, we always take the future back to the present or project the past to the present in order to know how much a business, idea or project is worth in today’s world.
What do we pay today for a dream? If an entrepreneurial idea does not fit our past experiences – whether we are a seasoned investor or an amateur – how do we value the company?
Our story is essential in convincing amateur or professional investors and partners. Yet, even with an amazing story, bias still plays a critical part in valuation and decision making. What happens after we tell a story that leaves an investor wanting more? The professional investor might be thinking “how much will I get when we go public or in round two” rather than “this is going to be interesting” (a trademark of an amateur investor according to Seth Godin’s presentation in “Nearly Impossible”).
We are always told to look to the future and we tell our children to do the same. Nevertheless, many times we base investment – and even life – decisions on the past. What is the price of your dream?
Suffering, patience, self-negation, are part of the life of an entrepreneur and often the price we pay for our dream. Money is not always the objective of our venture but it certainly is what it comes down to when we are talking about investment. Sad but true. Simple but not inclusive. Cents over sacrifice.
Net Present Value. Future cash flows. Debt and working capital. Sweat and sacrifice. What do we pay today for a dream? Sometimes the craziest dreams run by risky entrepreneurs are the ones that win. How do we make sure that the best idea wins? There really is no formula for success – however convincing your story or however poor your track record. Sometimes the best ideas look like bad ideas and sometimes disruption occurs undetected until it has slowly and fundamentally transformed an industry.
One thing is certain however. We look for value and relevance. If your story shows your investor that your idea is valuable and is relevant in the lives of people, you may just have a way of selling your dream and getting the much needed capital to make your venture grow, prosper and be valuable to you, your investor and the people you serve.