Business Consultant Pria Masson talks about taking startups beyond being just an idea, and shares basic factors that you need to consider in order to succeed.
Have you ever had friends and family who have a startup approach you for funding, or have you been the one asking for funding? It can be an awkward conversation mainly because if a company is at a stage where they are approaching friends and family, they usually do not have volumes or numbers and often do not even have revenues.
So, whichever end of the discussion you are on, figuring out how to value an idea, a very early-stage startup or even one after two to three years of minimal or no revenue – you likely can use some help in understanding what to do. This month, I try to help. As always, a reminder that this is not advice, it just my way of operating. Please speak to or hire someone to discuss your specific situation. Let’s dive in.
Do ideas have value? Absolutely yes, however, only if certain other aspects are in place. The idea needs to be backed by some clear, credible plans, rationale for the business, some steps towards execution and more than some skin in the game invested. An idea without a clear plan, with no step towards execution and nothing to lose, that could be just fiction.
For instance, I once had a client who owned (almost) a pre-school, she had some fabulous plans, she also had some interesting informal tie-ups for frameworks and execution. She was very passionate that this could be the next best thing, however, yes that however again, she was waiting for someone to back her up. She had no skin in the game, and she was so convinced her idea was fantastic, she also wanted a large amount of money to transfer that idea to someone. I was under professional obligation to help her, and I knew what the investor would say, and they did – that it’s just an idea. Anyone can have an idea. Where is the plan, where is the market and where is the person who will execute this. She had no experience in the business, then what was he (the investor) betting on? That is the investor mindset in a nutshell – they usually bet on the founder and their abilities. Everything else, it’s nice to have. This piece is a no-go.
Why is it so critical to understand the founder? Because the company will reflect the founder. That means when you invest in a startup, you invest in the founders. This encompasses their idea, their demonstrated ability to follow through, people management and even how they handle the hard questions. Ultimately, the biggest red flag is a founder who has unreal valuation expectations, needs too much money, doesn’t have an answer on challenges and expects you to trust them without a rationale for trust.
After the initial go on the founder, the next challenge is quantifying how much to invest, what the value is and to justify the investment. For these, there are several broad frameworks that get tweaked to attach numbers to factors that seem intangible. For instance, management strength – it’s not quantifiable. Or is it? What if various factors of a company in early stages had actual value attached to them. It is also not difficult to assume what revenues could be in best/worst realistic cases. To this we adjust the realities of the market in that industry with multiples and get a value. If, you assign a weight to each factor that goes into the success of a school such as quality of staff, facilities, curriculum, competition level etc. you will be able to create a matrix and have a total value. Is it scientific? Partly. Is it experience based and partly an art? Absolutely. Will it guarantee returns or success – no way. Yet, if you do this, there is a better chance that the basic factors that go in to succeeding, will be captured so it’s an educated bet. And bets need luck. Luck however, favours those who have done the work.
Pria is an experienced business consultant who works as a business coach and advisor helping clients with their strategy, business plans and idea assessments. You can follow Pria at her Instagram handle @guide¬_my_idea.
