Written by: Alan Curtis

Valuing a startup for exit can be difficult for the founding team, investors, and potential acquirers. Traditional valuation methodologies like discounted cash flow can come up short and other value drivers like market timing, buyer interest, and the startup founding team’s price expectation tend to drive M&A discussion.

Startups have no control over market timing or buyer interest, but they can be sure they are an authority in their market’s M&A landscape and make sure they are presenting the highest price possible.

Innosphere has a team of Associates that research investment activity on industry leading databases like Pitchbook and Bloomberg Terminals to arm client companies with the best information to handle M&A discussions.

(Email [email protected] for an example of a report.)

Do Your Research

Whether using industry databases, free online resources, or public company investor reports the amount of industry analysis on each M&A transaction is significant. Often, the reason for acquisition is clearly stated, but the valuation drivers are missing. Typically, companies are valued on a multiple of revenue or EBITDA. It’s feasible to use these companies and their acquisition multiple as a benchmark for comparison.

However, there is a growing trend of early stage startups with innovative, intellectual property being bought to help companies pursue new verticals or gain a stronger foothold in adjacent markets. This can be a challenging situation for startup companies because there aren’t clear M&A precedents, so it’s important to be creative and present additional value drivers.

Commonly Ignored Value Drivers

Here are other creative ways to drive up your acquisition price:

1. Show diversified customer base to the point where no one customer represents a significant percentage of revenue and the potential to grow each account
2. Show multiple methods of repeatable monetization for each customer (subscriptions, monthly fees, membership fees, or licenses)
3. Show that management team has created business processes that allow the business to scale without their direct involvement.
4. Show that the startup has a clear plan for assimilating quickly and painlessly into the acquiring organization
5. Show and quantify the opportunity for taking startup intellectual property into new markets or strengthening ownership in current markets.
6. Show that other buyers are interested and create a sense of urgency and scarcity during discussions.

Innosphere Early Exit Program

Planning and executing on an acquisition can be overwhelming which is why Innosphere has developed a program that helps startups and their investors plan for and achieve successful early exits through active management and a higher engagement of Innosphere resources.

If you are interested in learning more about Innosphere’s Early Exit program contact Mike Freeman, Innosphere CEO, [email protected].

 

Sources:

https://www.cobioscience.com/biobootcamp/Valuation_perspective.pdf