The Fuzzy, Incomplete, Valuations of Tech Startups
Accurate business valuations have always been difficult. This difficulty has only increased over the past decade with the rise of Intangible Assets. No industry has shown this more so than the fast-paced tech industry. The industry has been built on Intangible Assets such as patents and software, making traditional financial statements nearly useless when it comes to business valuations.
This issue was outlined recently in an article from Bloomberg Business. The article, The Fuzzy, Insane Math That’s Creating So Many Billion-Dollar Tech Companies, explains how the valuations of today’s biggest tech companies are all but pulled out of thin air.
As the article states, “Snapchat, the photo-messaging app raising cash at a $15 billion valuation, probably isn't actually worth more than Clorox or Campbell Soup. So where did investors come up with that enormous headline number?”
Authors Sarah Frier and Eric Newcomer discovered that today’s valuations boil down to a simple, four variable, equation:
Valuation = (Founders hopes and dreams x How fast its actually growing) – (Downside protection x Investor Fear Of Missing Out (FOMO))
While these variables should be considered, there are literally hundreds of others as well.
The largest group of variables that any company has is its Intangible Assets. With over 80% of any business’s value made up of Intangible Assets, they are critical to account for to determine an accurate valuation.
Not only do Intangible Assets have to be accounted for but also have to be done so in the correct manner. This is why BUSINESS INTANGIBLES™ utilizes the asset-based approach to valuation through its ENTERPRISE VALUE ACCOUNTING SYSTEM™. Individual Intangible Assets are valued by the market, cost and/or income approach to determine their true value. By considering all three valuation approaches, the most accurate valuation possible is attained.
An asset based business valuation method that takes an in-depth look at individual Intangible Assets is the most desired for accuracy. No company can be properly valuated without over 80% of its value accurately accounted for. Valuations require a value assigned to every piece of the company, including the Intangible Assets.
BUSINESS INTANGIBLES, LLC™ is a firm working with businesses by placing emphasis on their Intangible Assets. By utilizing our ENTERPRISE VALUE ACCOUNTING SYSTEM™ we Identify, Capture, Grow and Sustain the Intangible Assets that make up the majority of value within a company.