What is my company worth?
(And how to convince people it is worth more than it is!)
You will need to value your company one day if you want to raise money or sell it, but pricing anything, including your company, is not a science. At Tigerspike we once paid Price Waterhouse Coopers pricing for some advice on how to price one of the products we were launching. This was their genius response: “Try pricing it relatively high, and if it doesn’t sell then reduce the price until you do”. Thanks PwC pricing team that was worth the money!.
But actually, it was good advice because it is actually what you should do. Try to get as much for it as possible and if that doesn’t work, pull your pants down a little.
Olly and I went to Silicon Valley every year for 6 years and had 20+ meetings each time with VCs and Private equity people arguing about what Tigerspike was worth. It was fun, and most importantly it was a game of bullshit. That we played ok. Not amazingly. Not badly. But ok.
FOMO and Silicon Valley trends
What you really want is to have your company value have nothing to do with your company’s financial performance, but rather be linked to the value of other companies that are ‘trending’. You can see this clearly today: Look at any technology startup. How many are doing “Machine Learning” “AI”, or “Blockchain”?. All of them? I thought so.
To be clear, 90% of these companies don’t know what those words mean. They are saying those words to get a higher company valuation. Silicon Valley actually buys into these buzzwords and invests in them. Why? because the other Silicon Valley companies buy into them, and they don’t want to miss out on this big new wave (note, companies that actually do AI and Machine Learning will likely do well).
Essentially there is a Silicon Valley bidding war for trendy companies. The single best way of getting your company to be worth more than it really is, is to be part of this bidding war. Get many people wanting to invest in you or buy you, which you do by positioning your company in the middle of what is trendy. It sounds dumb but it works. It worked for us on our first raise. We had three companies interested in us because we are in the hot mobile space so we raised at over 3x revenues when we really deserved 1x to 2x revenues (more on what this means below).
If you are a fast-talking super slick marketing well-connected MBA American, you will play this game well. If not, don’t worry all is not lost, there are other ways to convince people you are worth more than you really are based on actual results because not all results are equal. If you have to use actual results you should use revenue (i.e. your sales).
Valuing your company on multiples of revenue
To value your company on revenues, you have to have no profits or very low profits (because if you have profits, they will value your company on profits, which will lead to a much lower valuation).
At Tigerspike one thing we were amazing at was increasing our revenues year on year. We were in the Deloitte Fast50 awards (that lists the top 50 companies by revenue growth over three years) for seven years. It is actually the award I am most proud of because it is based on actual results, unlike most other rewards which can simply be bought. Making the list for 7 years is very hard to do, since as your revenue gets bigger its harder, in percentage terms, to make the list. Only 4 other Australian companies have done seven times; most notably the amazing Australian success story, Atlassian, whose footsteps we tried, and (let's be honest) failed to follow in.
While we were good at generating revenues, we were not good at generating profits. For the first ten years, we never really made any. This sucked because it meant we didn’t have money to pay profit share or to spend on stuff in general, like nicer offices and other stuff that we wanted to. It was extra hard for us because for eight years we had no investment at all (this is called bootstrapping), so whatever meager profits we did have we needed to fuel our hyper-growth. We had to be scrappy and also really careful in terms of managing the company finances. I think it got us to where we did because with hardly any profits you can not afford to be sloppy with the finances at all.
But in terms of company valuation, no profit was a blessing in disguise. Because people like to value companies on multiples of profit, and since we didn’t have any profit they had to use our revenues, which unlike our profits, were pretty good. And remember not all revenue is equal.
Not all revenue is equal: Revenue model is much more important than revenue
The revenue you want
If you want to sell your technology company then you want recurring revenue (i.e. Money that comes in every month, rather than one-off). For technology companies, this recurring revenue defines you as a software company (or platform company or SaaS company) and is multiplied by a multiple of 5 to 12 times or more, rather than 1 to 2 times for a (non-recurring revenue) services company. Let me explain in the example below, which is a real example that Olly and I heard when we were in one of our many trips to Silicon Valley. This example will also show you how ridiculous Silicon Valley can be.
Company X did mobile phone application testing. Their customers gave them their mobile app and they tested it and gave back a report on where the bugs were / where it can be improved. This cost them US$10k. Company X was doing $5m of revenue every year and growing nicely. But the revenue was not recurring so the company was a services company and therefore valued at one to two times revenue: somewhere between $5m and $10m (i.e. $5m revenue x1 = $5m / $5m revenue x2 = $10m).
So one of the Silicon Valley VCs invested and then said: “why not change you from a services business with one-off revenues to a software company with recurring revenues”. All the existing customers had to sign up for new contracts: an annual recurring fee of US$10k (for which they got to test one mobile application, and they could cancel after the first test if they wanted to). See what happened here? Nothing! except the contracts changed. Now the revenue is recurring, and the company is now worth $25-$60m (i.e. Five to twelve times revenue). The CEO was actually surprised at how blatant it was. Well played Company X and well played Silicon Valley VC!
Look at Dollar Shave Club for a bigger example of this. They sold to Unilever for $1Bn in cash. Why? because they turned one off razor purchases into recurring monthly revenues. While avoiding profits of course! Well played Dollar Shave Club!
Side note: Many people will say that software companies are worth more because can scale more / grow faster than services companies, but actually much of the research shows that they can grow just as fast as each other, and both can be just as profitable.
What sort of company are you?
Or more importantly, what sort of company can you convince people you are; because what sort of company you are determines your valuation multiple.
As demonstrated by the previous example, services companies with one-off revenues are worth one to two times revenues, while software companies are worth between five and twelve times revenues. So it really pays off to have the right kind of revenues. To be the right kind of company (i.e. the more expensive kind!)
Tigerspike raised money twice at a multiple of just over 3x revenues (i.e our revenues were $10m, and so the company was worth just over $30m at the time). This was a good result for a services company, which is mostly what we were!, although we tried hard to be a ‘platform’ ‘saas’ or ‘product’ company (which we were in part, a smaller part than we would have liked — you can see me talking about it here. What I am doing is bigging up our platform which did have recurring revenues, but the reality was that less than 20% of our revenues were really recurring). What we should have done is made all our customers sign new contracts like Company X. The trouble was our customers were people like Shell, Emirates, Novartis, and AT&T, and these guys don’t always do what you want them to.
If we had maintained this 3x valuation multiple we should have sold for $150m. So why did we sell for half that? Two reasons:
- Because when we sold we had actually done a good job of generating profits, so Synnex could use that profit number rather than our revenue number to argue we were less valuable.
- We didn’t do a good enough job convincing them that we were a product or software company and so worth more.
Were we really worth $150m? no. Were we worth $100m? I think so yes, but a 25% discount isn’t too bad and leads me to the biggest piece of advice I would give to someone who is selling their company:
Don’t believe the story you are selling to the buyer. Take your ego out of the equation and accept a discount to what you believe the company is really worth.
Otherwise, you will never sell because every time you are approached by a buyer, you will think the company is worth more than it really is. Dan Ariely does a great job of demonstrating why we always overvalue our own creations in this Ted Talk.
So suck it up and accept that your amazing creation is not worth as much as you think it is. In my case, my younger ego driven self couldn’t do this, so every time we raised money, I went on holiday and Olly handled it. OK so I was on the phone with Olly (which pissed Lydia off because it was while I was on our honeymoon!) but he was certainly a more zen ego swallower back then than I was.
Good luck.
