How Do You Make Your Startup Worth $1B?

“Can you believe they just got bought for $300M!” Jeroen, my cofounder and VP Engineering, said to me. Jeroen, who was usually pretty mild mannered, was a little pissed off.

Before I could answer, Jeroen continued with his rant. “They haven’t even announced a product yet, and they have no revenue! It makes no sense.”

Image for post
Image for post
Picture: Depositphotos

The company Jeroen was referring to was started by ex-coworkers of ours. They weren’t in the same market we were in. They were using similar technology to what we were developing, but they were focused on a different industry.

Jeroen wasn’t done. “We’ve announced over 50 products and our valuation isn’t close to $300M. This makes no sense.” The he paused and said, “And we have lots of customers and sales!”

“Let’s look at who bought them,” I said as calmly as I could. “It’s a big multinational firm. Let’s look up what their market cap is.”

We went over to my computer. “No wonder!” I said. “Their market cap is $300B. They can afford to overpay!”

The value of your company is determined by the market.

Jeroen didn’t get it, yet.

“Think about it,” I said. “What percentage is $300M of $300B?”

“0.1%,” Jeroen answered.

“It’s a drop in the bucket. Don’t you see? They can afford to overpay!”

“But $300M? That’s a lot. If they were doing what we were doing, then they wouldn’t be worth even $10M.”

“I know,” I said.

Our ex-coworkers must have felt like they had won the lottery. They had developed a semi-working prototype, and now they were being acquired for $300M.

They would get $180M when the acquisition closed and there was another $120M earn-out if they met certain milestones. But this still doesn’t answer why the acquiring company paid so much.

If you have a company that can revolutionize an industry or create a new exploding market, then your company can be worth a lot of money.

The bet the acquiring company was making was that our ex-coworkers technology would revolutionize and enable a whole new industry. If the bet paid off, the company would be worth billions. If the bet didn’t pay off, the company would be worthless.

But the downside for the acquirer was minimal. $300M is 0.1% of $300B, so financially it wasn’t going to hurt them if the acquisition was a bust.

The value of your company is determined by the market.

You’re probably not going to be as lucky as our ex-coworkers were. We sure weren’t. So you’ll have to earn your valuation the old fashioned way by growing your revenue and building a real company.

But the valuation of your company will vary tremendously depending upon the market. A company with $10M ARR expecting to grow to $30M ARR in the next 12 months in one market can be worth a significantly different amount than another company with the same metrics focused on another end market.

It’s likely a mistake to change your focus to a hot market.

Years ago, I worked for a CEO named “Bob.” Bob was constantly chasing the new thing.

“Investors believe wireless is hot! Let’s focus on that.” The problem was we didn’t have any strategic advantages in the wireless market. The results were inevitable: we failed.

You’re much better off staying focused on the market you’re going after today.

Unless you’re limited by market size, or you can’t beat the dominant players, you’re better off staying focused on your existing market. The valuation will likely take care of itself. Stories like what happened with our ex co-workers are pretty rare.

In the end, our ex-coworkers technology didn’t pan out. The investment was a complete failure for the acquiring company, but our ex-coworkers were $180M richer. They won the lottery.

For more, read: What Are The Five Signs It’s Time To Sell Your Company?

Written by

I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store