It’s a Journey – Not a Transaction: Approaching Valuation When There is No Standard Approach

By Jason Felger
7/8/2019

This is my second post around lessons learned from the sale of a start-up I ran…the outcome was desirable, but the path to a sale was winding and sometimes messy.

In my last post on navigating a strategic exit, I addressed business development as the foundation for good corporate development strategy, shared the pitfalls of underestimating the timeline to transact, and hit on one of my core principles - that strong personal relationships might not fix everything, but they will certainly minimize damage. Next up – the challenges of valuation.

In our journey at Food Genius, my first instinct was to think about value as a multiple of our revenue – simple and straightforward. A sensible premise, perhaps, but one that is only valid if your company is being acquired for its revenue. Thinking about valuation in terms of revenue only and signaling that expectation is a mistake I’ve made and one I’ve seen others make many times. What I should have done sooner – really from the beginning – is think and talk about value creation, specifically through the lens of a future state when our business would be part of an acquiring company.

To provide some context for how to think about valuation, it’s worth taking a quick detour here to lay out the typical reasons behind tech M&A: who you are (the team), what you’ve built (your product/platform), and how you’ve scaled (your revenue).

The team is worth more than the sum of its parts and, depending on the potential acquirer, it can drive a compelling valuation on its own (an acquihire).

Your product/platform is often worth more than your own ability to monetize it. Many tech companies are acquired because they’ve built something that, in the hands of a larger or more mature company, can drive meaningful scale.

Your revenue is the most straightforward valuation approach – it’s a clear metric and public and private market comps are readily available.

This is simplified, of course, and I could go deep into the nuances of each of these factors. But in my experience, when you’ve reached the point that you (and the market) are satisfied with a valuation based on revenue multiples, the ambiguity of the process has largely been removed. What I’ve found to be much more difficult is how to approach valuation when a multiple of revenue isn’t appropriate or desired.

For example, we frequently see this situation play out: a still relatively early-stage company has built a solid product and found a decent product/market fit but hasn’t figured out the scalable go-to-market strategy to propel growth. If this is your company, how should you think about valuation and what should you have prepared when it comes time to talk seriously with potential acquirers?

These are the factors I wish I would have fully thought through to develop a valuation point-of-view during the development and sale of Food Genius. Of course, every situation is unique. It’s my hope that you’ll learn from my experiences and be deliberate in building a valuation framework that works for your individual circumstances.


Your existing solution at scale in their ecosystem

This is table stakes for an acquisition. You’ve likely spent some time thinking about this for the potential acquirers with whom you currently work with in some capacity. But can you go deeper here to address the magnitude of value creation in a future state where you’re part of this larger company? Look at factors ranging from product synergies and bundling opportunities to higher incentives from their sales team. This is important – if you’re forecasting growth without considering got-to-market synergies, you’re not giving yourself enough credit.


Your capabilities further developed with their insights/resources/scale

Plugging what you’ve already built into a larger organization is one thing, but the bigger question is what’s possible once you’re on the inside? Of course, without intimate knowledge of the potential acquirer’s strengths, weaknesses and synergistic capabilities, you’re at a disadvantage. The approach I like to take here is to presume you’re raising a large growth round of capital instead of modeling synergistic growth with an acquirer. This won’t get you 100% of the way there, but it will get you close enough for an intelligent and defensible conversation on how your business will scale with considerably more resources on hand.

[Side note: maybe you’re thinking “strategic acquirers stifle innovation and growth!” You might be right, but we’re focusing here on driving enterprise value, not executing post-merger.]


Your company’s blue sky growth

You should absolutely have a well thought out strategy for new large growth drivers that are likely out of reach right now, but plausible as part of an acquisition. These are the ideas that will get people excited about what’s possible. While you might not be able to use these ideas as a lever to bump enterprise value, they’re important for another reason – big, audacious growth plans demonstrate you’re thinking strategically and committed to long-term outcomes. And who knows…maybe you get one of these big ideas included in your valuation.

Above all else, don’t assume that a larger company has the perfect vision of how to derive value from a possible acquisition. You should have a strategy that outlines the post-acquisition opportunity with financials to back it up. This isn’t to say that your point-of-view will be adopted wholesale or even in part. But if you don’t have one, only one will exist – that of the acquirer – and it won’t necessarily represent what you think or what you want.

By Jason Felger
7/8/2019

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