Perception minus reality equals value
How can a fast-growth tech company get sold for $1 billion+ before their 100th employee, or even their first $ of profit?
It’s not the thick smoke in the air in Silicon Valley.
While the Valley has produced Instagram (50 people sold for $1B), Nicira (100 people no website $1.25B) and Oculus VR (75 people $2B), NYC was home to Tumblr (175 people $1.1B), Israel created Waze, snapped up by Google (100 people $1.25B) and Europe’s latest is UK-based Natural Motion sold to Zynga (200 people $500M+).
Buyers aren’t valuing revenues and profits, so they must be buying future potential. In reality, they are buying the perception of future potential. There’s an “equation” to describe this:
Perception – Reality = Value
Perception is not spin.
It’s belief that a target has the team, market opportunity and capability to be worth $5-10 billion in a few years, translating into a ‘present value’ of $1 billion+.
How can you possibly create the perception you might be worth anywhere near such an incredible’ price?
Here are a few guidelines:
Perception must be grounded in (enough) reality. The market opportunity needs to be big enough, and the target has to be a credible potential winner. We’ve seen different buyers value the same opportunity at $500m and $1B (hence the power of perception!), but the opportunity must be real enough to start with.
Perception value cannot exist without PR. If you aren’t talked about as a future winner, you won’t be valued as one. PR isn’t front page New York Times; its Gartner, bloggers, and pundits repeating your mantra that you will “win.”
Have someone who’s done it before and/or or a heavyweight core team. One senior exec who’s taken a company to IPO or sale can change buyers’ perception of your future worth. A heavyweight team underpins winner status. Without these, your value will be closer to reality than perception.
Do direct early corporate marketing to key buyers. If 1-2 cash-rich buyers understand and believe your plan to grow sales from $20m to $500m, their view of value will multiply. If $500m is too fanciful, outline how you get to $100m and repeat it, over and over again. It will also create competition to buy, a prerequisite to any “incredible” price.
Announce something major: a major customer win, commercial agreement, new product milestone, anything of real substance that can change perceptions of your worth. Then go on the road and sell it hard to potential buyers and influencers. Companies often get bought on the back of one major change/upgrade/milestone that, sold well, can change perceptions very quickly. 10 years ago it took 2+ years to change perception, today that’s down to 6 months.
Position what you do as “really hard to do,” and show why. If you are not solving a very tough problem, or dealing with very hard issues at scale, you probably are never going to be worth a lot of money. Many buyers don’t want to risk trying to replicate what you’ve done; they’d much rather pay up to reduce risk.
Now, for some good news. Our experience over 25 years is that target companies under-appreciate their disruptive potential, and their intrinsic worth, to the best buyer(s) at least 1/3 of the time. This means that 1/3 of the time targets leave money on the table because they don’t appreciate how much a buyer wants or needs them. So even if you fall short of a $1B valuation, trying is well worth it.
Posted by Victor Basta @MaExits