Valuation – A “Game Changer” for Startups
Abstract
According to market analytics, the investment in the startups of healthcare domain has escalated by 78% from the last year. The main reason for this escalation is the fact that the investors want to be “in the saddle” to take risks and venture into new healthcare business. For any startup to get funded, valuation plays a key role. The investors are interested to invest in companies with a promising picture. So, startups probing for funds or profitable exits should analyze each factor contributing to the high-rise of valuation. The prevailing essence of this think piece is to assist the healthcare startup entrepreneurs in assessing the valuation factors, work upon them and raise the company valuation.
Keywords
Valuation; Valuation methods; Investors point of view; Value plug-ins; Self-evaluation checklist
At a glance
- Introduction
- Significance of valuation
- Variety of valuation
- Vital plug-ins for startup valuation
- Market exits
- Sizing up” the market value
- Self-Evaluating Checklist
- Summary
Introduction
Thinking of becoming the “Next big thing”? You need to know what it takes to grow big. Let us take an example. Two healthcare startups are seeking funds- one with mind-boggling ideas; and the other mind-boggling ideas and a promising market value! Which startup has more likelihood of receiving the investment? Well, the chances of the second startup getting the funding are more than the first one, as the promising market value assures an investor of future profits on the investment made.
For any startup, the journey from a zero-sized company to a “Billion Dollar Club Member” requires a lot of strategies and funds. Seeking funds is a complicated process; however, proper business homework makes it less complicated. Company valuation fills in an important place in the homework as the investors hunt for companies with a promising valuation.
Valuation is a process for estimation of the net worth of any company. For a new startup, a clear understanding about certain points related to startup valuation is worthy. The complete understanding of valuation includes
- Significance of valuation
- Variety of valuation
- Vital plug-ins for startup valuation
- Market exits
Significance of Valuation
Valuation, in early stages of a startup, means the growth potential, and not the value of the company. The valuation aids the startups to:
Variety of valuation methods
The valuation of any startup helps them to seek investment. Most of the investors will ask about the company valuation in the first place. So, it is very important for the startups to choose and exercise the correct valuation method to acquire precise values.
There are four main methods of valuation:
- Score card method
- Check-list method
- Venture capital method
- Discounted Cash Flow (DCF) method
The startup valuation not only helps in attracting investors, but it gives the complete picture about the market valuation of the company i.e. price the market is ready to pay.
Attributes the investors look for in startups
Vital plug-ins for boosting startup valuation
The plug-ins also called as “Value Drivers” helps the startups to boost the valuation. Each plug-in is crucial for the “jazz up” of the business. Some of the most important plug-ins includes:
1. Outline
Having a complete outline of the business in a nutshell, is the “nucleus” for the startup growth. The business outline is customized according to the unique attribute of the startups. The complete outline of any business should include services that the company offers, the uniqueness quotient, growth potential, business strategy and chances of exit or IPO. The investors are interested in investing only if they have a clear picture of the company.
2. Top Players
A “Shipshape” management team acts as a backbone for any startup. The selection of the board of directors is a critical task. The investors are very much interested to know about the top players and their work attitude. If the board member includes domains experts and tech savvy people, it helps to resolve various problems.
In most cases, it is advisable to have most of the board members out of the company to have an honest opinion.
3. Branding
The term brand signifies “A promise of good quality.” The branding of any startup, helps the company to uplift the company’s image and to breakthrough. The branding is advisable to be done by professional marketing solution providers. Branding includes highlighting the company aspects with the help of social media, advertising, and other marketing strategies.
Branding helps to grab the user attention and promote expansion and growth. A good public relation team will add up more magnetism.
4. User Interface
According to Michael LeBoeuf, “A satisfied customer is the best business strategy of all.” The customer satisfaction plays a key role in creating a brand or even uplifting of the brand popularity.
In any business, the customer plays the role of “big cheese”. That’s why the User Experience (UX) is the uppermost interest of any business. The uplifting of the user experience is mainly the responsibility of the User Experience Design (UXD) team. UXD involves user interface design, business analytics, system modeling and user-based testing like UAT.
The user interface bridges the relationship between the user and the product.
Advantages of a good UXD team
5. Team Members
A team of qualified professionals is equivalent to “Good fortune” for any business. A talented team accounts for the brisk growth of any startup. The quality of the team is dependent upon factors like level of domain expertise, agility, innovative thinking and broad knowledge base. The investors always like a team of passionate and committed members as it reduces the risk of quality downgrading even with the change of management.
6. Market Adversaries
Insight about the market competition is very important for the entrepreneurs. The investors expect satisfactory responses related to questions like
- What makes the company “ahead of the pack”?
- What is the market scenario for the product?
- What edge does the product have over others in the market?
Having the answers to all these questions will help any startup to increase the company valuation.
7. Product Variance
Diversification of product and services provided by the company reduces the risk of market shrinkage. The mixed bag of product and services helps to reap stable revenues and help in upsurging of the company valuation.
8. Target Customers
The entrepreneurs should chalk up a clear projection about the target customers and their identification. In any business, a broad range of customer signifies great profit. So, it is advisable to have wide-ranging customers. The heterogeneity amongst the customer helps to curtail the risk of market flattening or loss of cash even with the loss of a group of customers.
9. Business Management
A proper business management plan helps in smooth running of the business. A well-planned business module helps to materialize the company track records regarding customer experience, quality of service provided, total expenditure and profit generated and employee performance. The well-defined business plan is like “a promise of profitability” even after the change of ownership.
10. Growth Potential
The business rule of investment by any investor depends upon the growth potential of any business. The demonstration of growth potential requires a well-defined growth plan that should include details about:
- Product market size
- Possibility of growing “Big”
- Add-ons to expand business
- Possibility of exits or IPO
11. Smart collaboration
A tactical approach to corporate collaboration may lead to a “Win-Win situation”. Collaborating with a reputed corporation not only raises the company’s professional competency but also helps to perk up the valuation.
12. Market Entry Barriers
Any new business built on innovative idea or product should fence-guard the market against mime competitors. Attributes of startup like intellectual property, licensing, publication and customized systems work as market entry barriers. The investors are very much interested in the market barriers as it signifies the scope of the business.
13. Financial Status
Every investor desires to invest in the startups with the potential to become a “Cash Cow” in future. The profits and cash generated by the startup captivate the investor’s attention. However, the stability of cash flow and profits are important as the risk of cash flow reduction due to change of ownership is less. The startups with decent stable cash flow and profit figures acquire a greater valuation.
14. Finance Integrity
The financial integrity of a company is a crucial aspect when it comes to seeking funds or making an exit. It provides a substantial validation of the profits and revenues, what the company is making. It also helps to gain the trust of investors and planning a suitable business management strategy. A company with up-to-date reliable financial records is preferred by any investors or buyers.
If an entrepreneur takes care of all the plug-ins and does a time to time self-evaluation of market value, it will help to acquire the right amount of funds. In the case of exits, it will get a fair “slice of the pie”.
Table 1: Top Healthcare startups with high market value
| Company | Market Value | Company Description |
| Palantir Technologies, Inc. | $20 billion | Software and analytics company providing data analysis services for healthcare industry |
| Theranos | $9 billion | Healthcare Technology company specializing in laboratory diagnostics. |
| Intarcia Therapeutics | $5.5 billion | Biopharmaceutical company |
| Cloudera | $4.1 billion | Software and data analytics company providing services to healthcare, IT and finance industries |
| Jawbone | $3.3 billion | Wearable Technology based company |
| Stemcentrx | $3 billion | Biotherapeutics company |
| Moderna | $3 billion | Healthcare company specializing in messenger RNA therapeutics |
| NantHealth | $2 billion | Healthcare company specializing in insilico molecular medicine services |
| Nutanix | $2 billion | Cloud computing provider company for healthcare and financial domains. |
| Domo Technologies | $2 billion | SaaS-based Technology company providing services to the healthcare, education, and financial sectors. |
Market Exits
In recent years, the healthcare startup world is buzzed up with a term “Exit”. The term exit signifies a situation when the company owner decides to sell the company in exchange of some assets. The exits are also highly influenced by the valuation, and the value adding plug-ins are equally important for the exits.
Exits are of two types:
- IPO
- M & A
Valuation not only influences funding, but it also has an extreme effect over the market exits. The buyers are interested in cracking a deal with companies having a reassuring future. In the year 2014, the amount of exit in healthcare startups has increased by a smashing record of 62 % and 140 in total numbers.
Source: CB Insights, Silicon Valley Bank
Table 2: Top Healthcare Startup Exits in the year 2015
| Startup Company | Company Description | Value Acquired | Company Acquirer |
| Flexus Biosciences INC | Immunotherapy company | $1.250 billion | Bristol-Myers Squibb |
| Aduro BioTech | Biopharmaceutical company specializing in vaccine preparation | $1,002 billion | IPO |
| Cord Blood Registry | Stem cell therapy company | $700 million | AMAG Pharmaceuticals |
| Seres Therapeutic | Therapeutic company specialized in clinical trials | $681 million | IPO |
| Glaukos Corporation | Medical technology company | $547 million | IPO |
| Spark Therapeutics | Biotherapeutics company | $540 million | IPO |
Source: CB Insights
“Sizing up” the market value
Evaluation of the company’s market value is a big work for any startup. The best-fitted method for any startup valuation is the “Checklist method”, but it may vary for different startups. An entrepreneur can self evaluate the company’s market value by answering a simple questionnaire related to the product/service and the markets.
Self-Evaluating Checklist
- Status of the product/service:
- A novel but budding idea
- Already processing profits
- Already tested by potential target users
- Already undergoing processing aided with market analysis data
- Product benefit role:
- An unique worth
- A comfort provider
- May be a “Pain killer”
- Support service providers
- Global market size of the product/service:
- $100 million to $500 million
- $500 million to $1 billion
- $1 billion to $10 billion
- More than $10 billion
- Annual Growth Rate of the company:
- Declining continuously
- Increased by 5%
- Increased by 10%
- Increased by more than 10%
- Status of market competition:
- No competition, as the product/ service is novel
- Big MNC’s are already dominating the market
- Startups are venturing as the market is new
- Alternative companies, as no head-on competitors are present
- User acquisition potential of the company:
- Not yet evaluated
- The product is gaining attention of users
- The users are placing orders
- The sales of product are decent
- Marketing strategy for the product:
- Product is innovative enough to grab attention
- Web designing will attract more the users
- A group of esteemed salesman will increase the sales
- A good marketing and business development team is required
- Annual profit earned by the company:
- Less than $1 billion
- $1 billion to $5 billion
- $5 billion to $10 billion
- More than $10 billion
- Forecasted annual profit for the company
- Less than $1 billion
- $1 billion to $5 billion
- $5 billion to $10 billion
- More than $10 billion
- The team players includes:
- All freshers
- PHDs with experience
- A good team along with marketing and business experts
- All “A-Level” employees
- Level of domain expertise:
- Fresher with great ideas
- 2 years experience
- 5 years experience
- More than 5 years experience
12. Market entry barriers:
- Intellectual property like copyrights and patents
- Government Licensing
- Trade secrets and trade marks
- Custom-built programs and prototypes
13. Company’s 5-year revenue projection:
- Less than $1 billion
- $1 billion to $10 billion
- $10 billion to $50 billion
- More than $50 billion
14. Business strategy:
- No need for business strategy
- I prepared myself
- Designed by business and market experts
- Designed by experts from business, marketing, finance and legal teams
15. Post product launch profit forecast:
- No profit
- Limited profit
- Gradual profit
- Exponential profit
16. Legal team includes:
- Local corporate and Intellectual property (IP) attorneys
- A local firm specialized in corporate and intellectual property suits
- A decently renowned firm specialized in working with startups
- Well renowned legal firm with esteemed team of attorneys with domain expertise
17. If big MNCs enters the market as competitors what would be the best business strategy:
- My product is one of a kind, so no need for any strategy
- Increase in the level of innovation and agility
- Patenting all the prototypes and acquiring government licsencing
- Crack a deal with the MNC and make a profitable exit
18. Pre market value of competitors:
- $1 million to $5 million
- $5 million to $10 million
- $10 million to $50 million
- More than $50 million
With all the answers to above-mentioned questions, the entrepreneur can identify the gaps and work on it. It will also help the entrepreneur to do a good homework before going to the investors or buyers.
Summary
The market value of any startup is dependent upon several factors varying from revenues to team members. A precise valuation of the company helps an entrepreneur to have a clear view of the company’s position, and it also influences the investors to entrust. All the entrepreneurs should invest time to figure out the right approach to increase the company’s market value and put together for the “Big Hit.”
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- http://www.aafp.org Accessed on 15th December 2015.
- https://www.cbinsights.com/blog/healthcare-startup-funding-trends Accessed on 15th December 2015.
