The post was originally published in Polish on Szymon’s LinkedIn profile. Szymon kindly agreed to republish what we think is of great value to our readers.
Funds valuate startups at prices for which nobody wants to buy them.
VC funds often valuate companies based on: the percentage of shares they want to own, the value of comparable transactions or the size of the expected exit. In this approach, a company with a presentation is suddenly worth millions. After the investment, the founders accept these amounts and use them as a basis for future transactions.
Szymon Janiak, Co-Founder and Managing Partner at Czysta3.VC
When it comes to the sale of a startup (in Poland it most often means acquisition by a large entity from a given industry), it turns out that the proposed valuation is completely different, and then there is a clash. When you live for a long time with the belief that something is worth millions, it is hard to accept that you can get a few hundred thousand at most. Plain psychology.
Why the difference? The company acquires a startup because it wants it: revenues, customers, technology, etc. For the acquiring company, the previously indicated percentages of shares, other transactions, and even more so exit – have absolutely no meaning. Valuation, depending on the purpose, may therefore be the cost of technology reproduction, a financial ratio multiplier (profit, revenue, EBIDTA) or, for example, a multiplier of the number of customers, transactions, etc. Turnouts can be huge. The sooner founders understand this mechanism, the better for them. At the end of the day, the old mantra comes true: a company is worth as much as someone is willing to pay for it.
The comment section adds a few clarifications:
If the founder doesn’t understand this, they probably don’t know the basics. Valuation of a company based only on a conversion rate of how much was invested in the company for how much percentage is falsified at its core. If a company has an MVP and a VC gives USD 1M for 20%, it does not mean that the company is suddenly worth USD 5M. Only when it delivers the product, customers, traction can we talk about real valuations. Before that, it’s just an empty shell, which is normal at this stage. It’s all the more funny that some founders try to trumpet it as a success and pump PR when it’s actually just the beginning of the hard work.
– Paweł Bylina, Co-Founder and CTO at BugBug.io
It’s simpler than it sounds, and that’s what I, as a practicing advisor, always talk about. Valuation is not a price. The valuation is tables, and the price is the real value along with the conditions that both parties accept. If we accept this, life will become simpler. Valuation is not a price.
– Tomasz Jakowiecki, CEO at Red Herring
Unfortunately, this is the result of the ongoing hype about investing. Everywhere people are being pumped with news about the billions that companies are worth, forgetting to add that this is not a value but a valuation.
And like any valuation, it is based on certain assumptions.
Just like on the stock exchange, someone will get pressed to buy one share for 1,000, and then everyone is already valuing the company as if all its shares were worth 1,000 each. And yet no one, buying in full, will pay so much.
And indeed, the mentioned aspect is also important, the purpose of the purchase, because it determines the valuation on the buyer’s side.
– Maciej Sobieraj, Founder of IT Architects Community
Szymon Janiak is an investor and a business-driven Managing Director at czysta3.vc, a Venture Capital fund located in Poland. He has over 10 years of experience in the technology sector. Szymon is also a Member of the Supervisory Board at stockbroker Grupa Trinity S.A.
