But my company is worth more than that!

How do you value a high-tech start-up?  There are many ways, but very few, if any, result in a value with which both the founders and the potential investors are comfortable.  I've seen methods like discounted cash-flow and net-present value, which isn't very accurate for a start-up with no revenue yet.  I've seen outlandish methods like "$1 million per patent" or "$1 million per employee" but these can be highly inaccurate as well.  Some kind of relationship between level of product development and potential revenue in the next one or two or five years is much more accurate, but still a guessing game.

If you're going for friends and family money, or even an angel round south of, say, $1M, the best general advice I can give is to avoid pricing the deal.  In other words, attempt to do a CPN (convertible promissory note).  This allows you to offer a discount to investors, and not having to commit to a valuation.

If, however, your investors are requiring preferred stock, and therefore most likely an equity round, then you will have to price the stock.  What should your valuation be?  Whether you try to use and justify any other methods, the bottom-line answer is "what the market will bear."  In other words, you and your investors should try to find "comps"...similar deals that have recently closed, then use that valuation, possibly adjusting for any differences between your company and theirs.

Design your next product like a competitor would

In one of my previous posts, I emphasized that you need to get your product out-the-door.  It's also important to have a product roadmap, as stated in this previous post.  So after you get that first product out, what should your next product look like?  Here's one answer, or at least an exercise you should do.  Pretend you are your competitor, looking at that first product.  What features would you add or change to make a compelling competing product?  Now, consider that product to be our next one.

Determining product pricing...bottom-up or top-down?

You have your first product done, and you're going to sell it for $15.  How did you determine this price?  Bottom-up method:  Simply put, determine how much it cost you to make it, add to this how much margin you need to make on it so that your company is profitable, and you get your ASP (average selling price).  This isn't as simple as it seems, since you have to factor in not only COGS, but shrinkage, returns, sales costs, and then going beyond just gross margin, you have to fold this into your overall financials that account for operating costs, etc.

Top-down method:  How much are competing products selling for?  Do a market survey of how much customers are willing to pay for the product.  Do a sensitivity analysis of how much product you'll sell at $X versus how much you expect to sell at $Y.

Which method is correct?  You need to do both to see if you have any overlap or not.  If the price you need to sell it at to make your financials come out is above what the market will bear, then you have a problem and you'll have to go back to see what can be adjusted.  But if it's the other way around, then you have some freedom to make extra margin, or to keep your price low and go for increasing market share to make that extra profit.

Above all, be brutally honest with yourself.  Be ultra-conservative in your numbers, and don't talk yourself into unreachable numbers just to make the financials look good.

Focus on your core competencies

There are many "layers" of product development, from core IP to a complete system.  To get a new, disruptive product out the door, sometimes you need to develop layers that are beyond your core competencies.  But be sure to do this for the right reason:  because it's necessary to gain market acceptance.  Then, once the market has accepted your disruptive product, shed the layers that aren't part of your core competencies and don't have high gross margins.  After all, it's your core competencies that help give you that unfair advantage over the competition.  Here's an example:  Qualcomm developed CDMA back in the late 80's and early 90's.  But to get this new, disruptive technology accepted in the market, it had to make handsets and infrastructure equipment (not part of its core competencies, and becoming commoditized).  Once CDMA became a popular standard, it shed its handset and infrastructure divisions, and focused on its core competencies:  IP licensing and ICs.

Get the product out the door and optimize later

This is a follow-on to my previous post on validating your market.  Entrepreneurs, especially engineer entrepreneurs, like to make that first product perfect.  It's nice to be a perfectionist and strive to make the best product, the most reliable product, with the right colors, or the right bells and whistles, etc.  But this will most likely come at the expense of time and money, and you might guess wrong on some of the features.  Build your first product (or service) and get it out the door.  Early feedback from customers is very critical, as it will tell you what you need to focus on for the next version.

No more boring presentations, please!

If I see another PowerPoint presentation that is "bullet, sub-bullet, bullet, sub-bullet, sub-bullet, bullet...." I'm going to puke.  Get creative.  Make some sizzle.  Stand out from the crowd by making a presentation that engages the audience, not puts them to sleep.  I don't mean throwing a bunch of animation up there either...that has become a bit cheezy.  Keep the message on each slide simple and powerful.  This might mean lots more slides, but that's okay...you'll roll through each one faster and keep your audience engaged.  And for heaven's sake, don't read your slides to your audience.  Your audience is capable of reading as well as you are.  Supplement each slide with expanded comment and not dictation.  And if you keep the message on each slide simple, your audience won't have to compete by either reading it or listening to you.

I realize there are different kinds of presentations, but in general the above advice should fit most types.  However, if you are giving a copy of your presentation (hard copy, or through email, etc.), then you might have to format it differently, since the slide deck for a powerful live presentation might not come across the right way in a non-live setting.  I'll probably expand upon this in a future blog.

Have you validated your market?

This post is a follow-on to this post where I asked "Are you solving a real pain?"  Entrepreneurs sometimes get caught up in believing in their own product so much that they really fail to validate the market before fully developing the product.  This also is sometimes referred to as "drinking your own kool-aid."  There are numerous ways to validate a market, depending on the type of product or service you are offering.  Let's say you want to offer a new widget for sale on the web.  Before you even spend a penny on developing it, how about spending a few bucks on a website that describes this widget, perhaps a little money to SEO it, and a button on your website that says "Click here for more info" and another button that says "Order Now" (which can return a polite message referring to order-backfill).  Even before you can fulfill any orders, you are collecting very valuable market data...all before you've spent a penny on developing possibly the wrong product.