The Value Circles of a Start-up

Over the years, working with start-ups and investors (as well as starting a few and selling one) taught me how to understand the value of the special breed of companies called “start-ups”. Today, after giving my pitch to a friend (Noam Bernstein) he mentioned I should write a Medium post about it, so I guess that’s what I’m doing now.

The Team

Every start-up always starts out as a team. The team itself, as a whole, is worth more, sometimes much more, than its team members alone. You can think of it as an engine — torn apart it can’t do much, but assembled together, it can exert a lot of force. A team is a construct which has proven to be able to work together and to deliver value, in a specific area of expertise. For example, a company which developed a game can always be repurposed to build other games, but a random bunch of developers can’t necessarily do that, because it is missing all the different components, as well as the right manager.

Technology

If the team has managed to build useful technology during its attempt to build a start-up, it is worth a lot — at least the time it took to develop it times the number of developers it took to develop, times their salary. Keep in mind that technology by itself is worthless, as engineers always have to maintain any piece of code or other types of technology, for it to actually function in the real world. In many cases, when the team receives a large amount of compensation, it is also due to the fact that the acquiring company wants the same developers which build the technology to stay for a few years and integrate it in the acquiring company.

Business

Successful companies manage to utilize their technology to build a thriving business. The business component is made up of all of the signed partnerships, paying customers, business agreements, etc. and a lot of times is considered to be less significant when valuing early-stage companies because it takes time to build a business. For later-stage companies, the business can be significant and is usually valued with some sort of typical multiplier that is common for that type of company, just like any business.

Strategic Value

Last but not least — and the most critical component of fast-growing companies is the strategic value of a start-up company to a potential acquirer. Let’s take an example — let’s say that a company has developed amazing technology to migrate your servers into the cloud. The company can either go and sell their product, one customer at a time, or they can get acquired, and use the thousands of already existing customers of the acquirer who are looking for the solution you’ve developed and are ready and willing to pay for it. Not only that, what the buying company really wants is to block the company not to merge with other competing companies (e.g. Amazon won’t want Microsoft to buy the cloud migration company because it will give Microsoft a relative advantage over Amazon).

Conclusion

If and when you decide to build a start-up company, it is very important to create a “hedge” in the form of formalizing your potential strategic value to other companies and directing your tech and product there as well. As most companies will not reach an IPO stage (just because it’s very hard), it is always important to think about how your companies can create even more value to larger companies which dominate the space your company operates in — in the common case which you won’t be able to reach enough customers to become a sustainable long-running company.

An entrepreneur, and a web expert.