Why Entrepreneurs Need a Market-Integrated, Data-Driven Approach to Valuing Startups

We’re excited to bring back Transform 2022 in person on July 19 and virtually from July 20-28. Join leaders in AI and data for in-depth discussions and exciting networking opportunities. register today!


When you want to sell something, what is the first thing you do? You find out what the market usually pays, then adjust up or down accordingly. Value is relative and market prices help you establish a baseline that allows you to sell quickly and for the highest price. Since this has worked for centuries for all sorts of assets, why is it so hard to sell startups?

Entrepreneurship is in a golden age. Mergers and acquisitions (M&A) activity hit $3.6 trillion in 2021 in more than 35,000 transactions – and private equity firms expect the revival to continue. If you own a profitable and growing startup, you won’t find a better time to sell or “get acquired”. But one thing stands in the way of a successful exit: your valuation (ask price) and how you calculate it.

Admit it: you’re emotionally attached to your startup and probably won’t care about it. objective assessment. Without data to back up your asking price, buyers won’t engage with you, let alone make an offer. Buyers need your performance indicators to forecast their returns, then they’ll apply an appropriate multiple to your revenue or profit to arrive at a realistic valuation.

Assessing your startup’s historical performance is simple. You already have the data. Deciding on the multiple, however, is much more difficult. Not only does the multiple reflect 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 you be aware of such insider knowledge? Unlikely.

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

Multi-billion dollar deals or industry averages posted online won’t meet your needs either. M&A professionals who do deals for a living can get a more accurate valuation (and help you get acquired). But their advice isn’t free, and if your startup is small, that might seem like overkill. Plus, shouldn’t you be able to add value to your business without bringing in 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, disheartening, and could ruin your dreams of acquiring or starting a new business. In other words, your valuation can make or break your chances of acquisition, and potentially, your career as an entrepreneur.

It may sound harsh, but imagine working for years only to have a buyer or business broker tell you that your startup is worth half of what you thought. Over time, your valuation expectations can become fossilized and end negotiations before they begin. 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 might not have revenue, profits or even customers and still sell for millions of dollars. Such strategic acquisitions are rare and evade conventional valuation models. You’re better off focusing on the larger market – financial buyers who want a return on their investment.

You’ve probably heard financial buyers call appraisals an art and a science. The defining metrics and attributes of your startup are the science. Art is where things get complicated. How do you value intangible assets like reputation, dominance or talent? Rather than pulling a multiple from the sky, M&A professionals look at past acquisitions to establish a baseline and work from there.

But it won’t work for you. Why? Only the most important transactions make the headlines and investment brokers and investment bankers remain discreet about their transactions (they are usually under NDA). A published M&A report can point you in the right direction, but if you want to evaluate your startup more accurately, you need to extract the most relevant data.

Who has the power to give you better ratings?

The solution to the data accessibility problem may lie in startup acquisition markets. The rise of platforms such as Flippa, MicroAcquire, and FE International has helped accelerate M&A activity by digitizing or automating processes and cutting out middlemen. They list thousands of startups and should track completed acquisitions as a measure of performance.

What is the purpose of these marketplaces? They want to help you sell your start-up. It’s 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 no business. With that in mind, shouldn’t these marketplaces help you establish your valuation?

They already have your data, including performance metric, startup industry, number of employees, tech stack, and more. All they would have to do is match your data to similar startups that have been acquired in their markets. If they anonymized the data, you probably wouldn’t mind if they added your details to an assessment tool that would give you a more accurate assessment.

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 need a professional appraisal, necessarily, and you’d attract better deals from seasoned buyers who know a fair deal when they see one. Just knowing you have a realistic asking price can give you the confidence to hit it at the exit.

How would market-integrated valuations work?

Imagine a startup acquisition market. Let’s call it Startups4Sale, and assume it has closed at least 1,000 acquisitions since its inception. Also suppose he asks founders for detailed information about their startups, including performance metrics. When each founder reports an acquisition, Startups4Sale logs their details and asking price to monitor market activity.

Currently, this acquisition data helps Startups4Sale founders know how their market is doing. These are passive data. But if they matched the data points of closed startups to those still listed, they would get an instant indication of whether that list’s asking price was realistic. Imagine what they could do with this idea. How could this 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 sold in the market” and suggest you lower it. They might suggest an alternative – not a hard number per se, but a range within which you can decide on a number that also covers intangibles like reputation, brand, and talent.

Maybe Startups4Sale sees a bigger opportunity in opening up the data to other founders, those who aren’t yet thinking about listing their startups. This could create a separate assessment tool that syncs with their marketplace but is open to everyone, capturing an even bigger data set. Over time, such a market-integrated, data-driven valuation methodology would only become more accurate.

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

Andrew Gazdecki is a former CRO and founder of MicroAcquire.

DataDecisionMakers

Welcome to the VentureBeat community!

DataDecisionMakers is where experts, including data technicians, can share data insights and innovations.

If you want to learn more about cutting-edge insights and up-to-date information, best practices, and the future of data and data technology, join us at DataDecisionMakers.

You might even consider contributing an article your own!

Learn more about DataDecisionMakers

Leave a Comment