What's it worth?

At the recent Seed (Capital) Initiative seminar, there were a few questions posed, and many more unasked, about valuation.

The focus of the value questions in that setting was how to value a start-up company. I think a different question must first be asked: What is of value within a company?

Even more important, what is of commercial value within the company? Identifying the thing or things of value allows a structure to be developed to maximize that value. Without structure, the value is never monitized.

Whitney Houston is easily identified as of value to Arista Records. Without the structure that Arista provides in selling her records, her artistry would have only its intrinsic beauty and grace. Far less obvious than Houston’s value is the value of potato peels. Yet J.R. Simplot, which processes billions of pounds of potatoes annually, identified value in this waste byproduct and profitably uses it to feed cattle in its ranching and feed lots. In this case, J.R. Simplot’s structuring took what was garbage and made it valuable.

These examples are purposefully not high tech or “new economy” so that they can be easily understood.

But the same holds true in a high-tech venture. Entrepreneurs of start-up companies passionately believe in the value of their concept, product or service. As wonderful an idea as it may be, at its initial stage, the value only lies in its potential. A business structure must be developed to exploit that identified value. Going back to Houston, if she only sang for pleasure as a hobby, the intrinsic value of her music would remain the same, but the commercial value would change from vast to nothing.

To complicate the matter of value, external factors can significantly affect the value of nearly identical ideas. Time to market and first to market are often cited as being vital, and this is generally so. The market originally valued the idea of selling pet food on the Internet very highly. Today, the odds of financing a new business similar to Pets.com would be minuscule. Being one of the first to market was of enormous importance to Pets.com.

Yet, Apple Computer was in the market with the Newton years before 3Com’s Palm Pilot. Even with the supposed advantage of early to market, Newton failed, while Palm soars. There are differences in the products’ size and some functionality, yet it was most likely the consumer attitudes of that time that doomed Newton, and the current attitudes that boost Palm.

Newton had virtually no competition and failed, while Palm has enormous competition and retains 80 percent of the market. Both Apple and Palm identified similar products of value and had structures to take the product to market, but things outside their control greatly affected their results.

So, have you identified what is of value in your company? Do you have a structure to make money from that value? Are you prepared to act as quickly as the market demands, and even then, are you prepared to encounter something completely beyond your control? These are but three points in your plans, but they should say to the entrepreneur that having a great idea or concept is not close to a guarantee of having a company of value.
If you accept the reality of a very harsh market that is concerned only with commercial and not intrinsic value, you can position yourself and your company to give both the best chance of success.
Erwin Bruder ([email protected]) is president of The Gordian Organization, which provides business planning and structuring services to start-up and growing companies. Bruder can be reached at (216) 292-2271.