Valuation or how to apply the art of divination to startups

The unicorn is a legendary and spooky animal in the internet world. It is also a term used to describe startups valued over $1 billion. A process that is as much the art of divination as the promise of better days.

Valorization, between promise of success and mirror to the larks

Square, a company specializing in mobile payment, was valued at $6 billion, taking successive fundraising campaigns from investment funds as a benchmark. However, the firm had to correct its copy of 3 billion dollars to go public on November 19. A 50% drop was made to attract new investors and ensure the development of this startup. A logical action but totally improbable for ordinary mortals.

As the company’s performance did not live up to the promises made, it was necessary to react in order to attract new investors and protect early investors via an undervaluation mechanism to protect them from any loss. The price before IPO goes from 13 dollars to 9 dollars per share. At the end of the day, fresh money is raised and the stock is listed at $13, the original target. And the existing shareholders were able to make their tumble by reselling part of their shares.

the pride of having lifted

But long before finding yourself in the situation of Square or the 142 other digital unicorns, valuation is a central point of discussion: it is both a tool for communication to the general public and the formalization of promises made to private investors. Promises that will have to be kept to have the right to new funding for:

  • continue to develop
  • have new communication arguments with future investors and end customers.

98 million euros raised from investors in October then 86.5 million in November 2015 according to the Journal Du Net. So many announcements made on the various media and presented as elements of success for a whole section of the digital community. Information affirmed as a certainty of economic health at the highest level of the State, the initiative French Tech on your mind. However, these are for the moment only the proof of the indebtedness of companies vis-à-vis their creditors and not of the creation of value and the proof of the dynamism of the French territories.

A very promising volume of business which reflects the potential of Made In France startups, but which currently only generates 300 jobs

BlablaCar, a French nugget that has joined the private club of European unicorns, is present in 19 countries for an estimated revenue of 66.2 million euros according to Business Insider. A very promising volume of business which reflects the potential of Made In France startups, but which currently only generates 300 jobs. An example sufficient to bend your chest and say that France is a major player on the international digital scene?

“I raised 2 million and my company is valued at 10 million! And the turnover?

37Signals

This is a startup known for having succeeded without fundraising and on an optimum model: no initial investment, no office and therefore making telework the basic value of the company, revenues and profits in millions. euros, time spent at work approaching 20 hours per week (the story must have been very different at the start of the company, however) and books written by Jazon Fried to talk about the 37Signals “method” which sell like hot cakes.

Some companies laugh out loud in the face of this frantic race for private capital that has become an informal rule and a necessary path to success, even success in itself for some startupers. Starting with Jason Fried, founder and CEO of 37Signals, who openly mocks the valuation of startups in an article titled “Press Release: Basecamp Valuation Hits $100 Billion After Bold Fund Investment”. For the astronomical sum of 1 dollar, several fictitious investment funds would have obtained 0.000000001% of his company. A very nice publicity stunt and a snub to startups who see fundraising as a success in itself.

Because we have to keep measure: fundraising is a tour de force in itself but is only a growth accelerator. Until the company goes public or the turnover is higher than the expenses generated, the various fundraisers will only generate additional constraints: more time spent reporting to your investors, more necessary justifications to use the capital obtained, more people who think and less who do. And above all, less time spent selling your paid services and products.

And it is in the clever mix between hunting for investors and hunting for customers that makes the job of a start-up entrepreneur all its difficulty and its flavor. Those who have the right supports at the right time are often the winners. A whole matter of timing.

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Valuation or how to apply the art of divination to startups


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