Valuations of start-up companies, we’ve seen in the previous blog article, is an extremely complex but important aspect of the funding/investment application process. In our previous blog, we focused on the first 5 questions of 25 critical questions to answer that will help you understand what the investor is thinking when it comes to valuing your start-up company.
This Blog Article focuses on the next 5 (questions 6 to 10) questions of 25 critical questions. Kindly do check in with JTB Consulting in the coming weeks for the follow up Blog Articles to learn more
Question 6
My primary competitors (others who are competing for the same consumer dollar by satisfying the same consumer need) are:
- Non-existent, since customers are not spending money to satisfy the need that I think they have
- Large companies with big R&D and marketing budgets and existing distribution channels (i.e., I’m entering a mature industry dominated by large competitors)
- Other start-ups that I may or may not know about (i.e., I’m entering a fairly new market being explored by other start-ups)
- Substitutes (e.g., the word processor is a substitute for the typewriter, which in turn is a substitute for pen and paper – in other words, what I offer is new and doesn’t have a direct competitor yet, but customers have other ways to satisfy these needs)
Why is this important:
Whether consumers know it or not, every need is being filled – perhaps poorly – by a direct competitor or by a substitute product. If you don’t have any competitors, then there is no market for you are selling. On the other hand, if you plan to enter a market that is already well served by established companies, you can expect market entry to be a challenge. The ideal situation is where needs are currently being served by poor substitutes. For example, suppose it is the early 1980s and the demand for mobile communication is being served by pay telephones. You come along with the first mobile phone – clearly, it is superior to pay phones.
Question 7
My customers (or potential customers) have:
- Not been identified
- Expressed interest in what I am doing
- Helped my team develop the product specifications and have placed pre-orders
- Purchased and raved about my product, and have placed repeat orders
Why is this important:
In order to fill a need, you need to know your target customers extremely well. This helps to ensure that you’re building something that the market actually wants.
Read More: How Mark Zuckerberg of Facebook Started
Question 8
My sales and marketing plan is:
- If I build it, they will come
- If I build a website, optimize my keywords, and submit it to Google, they will come
- I will hire a bunch of salespeople on commission only to go sell my product
- I have an extensive, well-researched sales and marketing plan that includes a mix of proven, cost-effective sales and marketing tactics
Why is this important:
Business is all about generating revenue and profits, so you need to have a clear understanding of how you will explain the benefits of your product or service to your target audience, and persuade them to pay for what you offer. The more detailed your plan is, the more believable it is.
Read More: How Pokemon Go Started
Question 9
My revenues over the past 12 months were:
- R0 to R999,999
- R1,000,000 – R4,999,999
- R5,000,000 or more
- R10,000,000 or more
Why is this important:
Nothing – absolutely nothing – validates a business like paying customers. It proves that your company fills a real need in the market. By the time you’ve achieved revenues, you’ve also developed much of your company’s infrastructure, core team, and initial product, so there is substantially less risk – from the investor’s point of view – than in a pure start-up.
Question 10
My strategic partnerships consist of:
- A few emails exchanged with this guy I met at a local networking event
- A letter of intent drafted by a potential distributor for my product
- A handful of legitimate signed partnerships and more in the works
- Exclusive R&D, licensing, supply, and distribution partnership agreements signed with a hand full JSE-listed companies
Why is this important:
If you can convince well-established companies to put their reputations on the line by partnering with you, that says a lot about your product’s market potential. This reduces the risk to the investors, and hence increases your valuation.
Read More: Valuing Your Start-Up Company 101 (Volume 1 of 1)
